Question

You have a 7 year investment horizon and are considering one of three bonds to purchase. Bond A has a 10 year maturity and a 7 year duration. Bond B has a 15 year maturity and a 10 year duration. Bond C has a 7 year maturity and a 5 year duration. Describe the conditions for which you would purchase each bond.

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Answer 1

We would consider the First option, which is investing in Bond ‘A’ of 7 Years Duration with 10 Years Maturity. Usually a bond with a longer maturity usually pays a higher interest rate than a shorter-term bond. Likewise, 20-year Treasury bonds will pay a full percentage point or two more interest than five-year Treasury notes. A longer-term bond carries greater risk that higher inflation could reduce the value of payments, as well as greater risk that higher overall interest rates could cause the bond's price to fall. Bonds with maturities of one to 10 years are sufficient for most long-term investors. They yield more than shorter-term bonds and are less volatile than longer-term issues.