Products & Their RisksQuestion 150 of 398
An investor holding a 20-year municipal bond faces the greatest interest rate risk because:
a.Municipal bonds are tax-exempt
b.The bond's coupon is variable
c.The longer the maturity, the more the bond's price falls when interest rates rise
d.Municipal issuers never default
Explanation
Interest rate risk is the tendency of bond prices to fall as market rates rise, and it increases with the length of maturity. A 20-year bond's price is far more sensitive to a rate change than a 2-year bond's. This is a form of systematic risk that affects all fixed-rate bonds, tax-exempt or not.
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