Suppose you hold bonds in your investment portfolio and are concerned about interest rate risk. Other factors equal, which of the following statements is true?

O Your short term bonds have more interest rate risk than your long term bonds.

O Your long term bonds have more interest rate risk than your short term bonds.

O Your high coupon bonds have more interest rate risk than low coupon bonds.

O a & c are true.

O b & c are true.

Answer: Your long term bonds have more interest rate risk than your short term bonds.

Explanation:

Longer term bonds are considered riskier than shorter term bonds. This is because due to their long term it is generally feared that a rise in Inflation could reduce the payments due from the bonds.

There is also a fear that the price will have more exposure to interest rate risk overtime as interest rates could rise over the duration of the bond.

For these reasons, the risk is higher on Longer term bonds and as such the rate charged on them is higher as well.

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