Question

If there is decline in interest rate, which would you rather be holding, long term bonds or short term bonds? Why? Which type of bond has greatest interest risk?​

Answer 1

Long term bond

Explanation:

1) Long term bonds are the bonds that matures after one to four years. These bonds are near the safer end of risk spectrum, due to their short duration there is less interest risk and less credit risk.

2) Short term bonds are the bonds have a greater maturity period, usually more than ten years and upto 30 years. After maturity they pay higher interest than short term bonds.

3) Long term bonds have higher interest risk than short term bond, even minor fluctuations in interest rate can affect their price. They rise with fall in interest rates and fall with rise in rates.

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