Understanding Interest Rates and Financial Risk Quiz

Interest rates enable the borrowing and lending of funds by influencing the cost of capital.

Rising interest rates lead to decreased bond prices due to the inverse relationship between interest rates and bond values.

Bond prices and interest rates move inversely; when interest rates rise, bond prices fall, and vice versa.

Fixed-rate loans feature a stable interest rate over the duration of the loan, offering borrowers predictable payment amounts.

Default risk refers to the probability of a bond issuer failing to meet its debt obligations, potentially leading to investor losses.

Repricing risk denotes the potential adverse impact on financial assets or liabilities resulting from fluctuations in interest rates.

Risk premium is the extra return investors demand for accepting higher risk levels associated with an investment.

Interest rate risk pertains to the potential decline in an investment's value triggered by fluctuations in interest rates.

The federal funds rate is the interest rate at which banks loan reserves to each other overnight, set by the central bank.

Currency exchange rates do not directly affect interest rates, as they are influenced by factors such as inflation, monetary policy, and economic conditions.

Credit risk refers to the potential loss arising from a borrower's failure to repay a loan or debt obligation as agreed.

Nominal interest rate represents the raw interest rate without factoring in inflationary effects, providing a straightforward measure of borrowing and lending costs.

The Discount Rate, established by the Federal Reserve, serves as a tool to impact short-term interest rates, influencing borrowing and spending in the economy.

The yield curve illustrates the connection between the yields of bonds with different maturity dates, providing insights into future interest rate expectations.

Duration quantifies the price sensitivity of a bond to fluctuations in interest rates, providing insights into its price volatility.

Interest rate risk in bonds is influenced by factors like the time until the bond's maturity, as longer maturities expose bonds to greater interest rate fluctuations.

The term structure of interest rates describes the pattern of interest rates across different maturities, providing insights into future economic expectations.

Various factors including inflation expectations, monetary policy, and economic conditions collectively influence the term structure of interest rates.