Corporate bonds usually pay interest semiannually. If a company decided to change from semiannual to annual interest payments, how would this affect the bond's interest rate risk?

the interest rates increase

Explanation:

The interest risk will increase because the credit is being paid more slowly. Bonds are valued based on the relationship between the coupon rate and the market rate. A longer payment frequency doesn't mean that the investors will lose money, it simply increases the variance of the bond's price.

E. g. if the market rate is lower than the coupon rate, then the price of the bond will increase more, but if the market rate is higher than the coupon rate, the price of the bond will decrease more. Investors are risk adverse, and when the variance of a security increases, risk increases, and they require higher returns to offset the higher risk.

Answer: The interest rate will increase.

Explanation: As the bond is been paid back slowly, the cash flow would be exposed to interest rate changes for a longer period of time. Any change in the internal flow will increase a larger value of the bonds