Which of the following is a risk associated with investing in bonds?

Interest rate risk is a significant consideration for bond investors because it pertains to the inverse relationship between interest rates and bond prices. When interest rates rise, newly issued bonds pay higher rates, making existing bonds that pay lower rates less attractive to investors. Consequently, the market price of these existing bonds declines in order to offer a competitive yield relative to the new securities. This risk is especially pronounced for long-term bonds, as they are more sensitive to changes in interest rates compared to short-term bonds.

Understanding interest rate risk is crucial for managing a fixed-income portfolio, and it plays a key role in the decision-making process for investors when selecting bonds. While other risks like exchange rate risk pertain to investments in foreign bonds and can affect returns, interest rate risk is universally applicable to all bond investments regardless of their currency or underlying asset structure.