Question

Interest Rate Risk is the risk that arises for bond owners from fluctuating interest rates. All other things being equal, the _______ the time to maturity, the _________ the interest rate risk.

Answer 1

Answer:

Interest Rate Risk is the risk that arises for bond owners from fluctuating interest rates. All other things being equal, the longer the time to maturity, the greater the interest rate risk.

Explanation:

Opportunity risk explains the opposite interrelation between the interest rate and bond prices. When an individual purchases bonds, he/she takes it as given that if there is a rise in the interest rate, the person will withdraw from buying the bonds with more tempting returns. Every time the interest rate goes up, the need for current bonds with lower returns goes down since new opportunities to invest appear.

In general, the shorter the time to maturity, the smaller the interest rate risk and vice versa. Long-term bonds suggest a greater possibility of changes in the interest rate.