Which type of bonds should short-term investors choose if they want to avoid high bond price...
Which type of bonds should short-term investors choose if they want to avoid high bond price risk? Explain it.
Homework Answers
Price risk of a bond is related to market price of a bond and it is a risk that market price of Bond will fall due to rise in market interest rate.
When there is a high bond price risk, then short term investors should be choosing short term bonds because these short term bonds will be providing higher security due to higher interest rates and the bond yield on short term bonds will be higher than yields on long term bonds so short term investors would be choosing short term bonds because they will be lesser exposed to rising interest rates due to their short duration.
Long term bonds will be subject to Greater price risk due to greater probability of change in interest because interest rate will rise within a longer time period than a shorter time so they need to avoid these long term bonds.
They should be choosing short term bonds if these short term investors want to avoid high Bond price risk.
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