Question

Which bond portfolio where all investment is made up front would be most negatively affected by a sharp rise in interest rates?

Answer 1

Option C. barbell

By definition, money market products are liquid. Each buyer knows that they will be paid when they mature in the near future, so they are easily traded at a discount that matches the market rate.

When interest rates rise, bond prices fall (and vice versa), and long-term bonds are the most sensitive to changes in interest rates. This is because longer-term bonds have longer durations than shorter-term bonds that are nearing maturity with fewer coupon payments.

Special considerations. Series I bonds are considered low risk as they are backed by the full trust and credit of the U.S. government and do not depreciate in redemption value. However, that security comes with a low yield comparable to high-yield savings accounts and certificates of deposit (CDs).

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