Why does the longer-term bond's price vary more than the price of the shorter-term bond when interest rates change? The change in price due to a change in the required rate of return increases as a bond's maturity decreases. Long-term bonds have greater interest rate risk than do short-term bonds. The change in price due to a change in the required rate of return decreases as a bond's maturity increases. Long-term bonds have lower interest rate risk than do short-term bonds. Long-term bonds have lower reinvestment rate risk than do short-term bonds.

Question

Penny

Business

4 October, 03:49

Why does the longer-term bond's price vary more than the price of the shorter-term bond when interest rates change? The change in price due to a change in the required rate of return increases as a bond's maturity decreases. Long-term bonds have greater interest rate risk than do short-term bonds. The change in price due to a change in the required rate of return decreases as a bond's maturity increases. Long-term bonds have lower interest rate risk than do short-term bonds. Long-term bonds have lower reinvestment rate risk than do short-term bonds.

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Eleanor Griffin · Answer 1

Answer: Long-term bonds have greater interest rate risk than do short-term bonds.

Explanation: In simple words, Interest rate risk refers to the risk of probable decrease in the value of a bond due to fluctuating interest rate in the market. This risk is usually faced by fixed income assets and highly depends on time and maturity.

In case of long term bonds this risk is high because the time to maturity is long and there are high chances that the interest could fluctuate again.