Question

Long-term bonds are:______ a. riskier than short-term bonds, and so interest rates on long-term bonds are usually lower than interest rates on short-term bonds. b. riskier than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds. c. less risky than short-term bonds, and so interest rates on long-term bonds are usually lower than interest rates on short-term bonds. d. less risky than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds.

Answer 1

Answer:

b. riskier than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds

Explanation:

Long term bonds are more riskier than short term bonds because the risk related to a bond increase when the time to maturity is longer. For example for a long term bond the interest rate risk is higher because there is longer time that the interest rates may increase and the price of the bond may fall.

Because of the higher risks the issuer of long term bonds offer higher interest rates on them compared to short term bonds in order to attract investors as investors will require a higher interest on log term bonds because of the higher risks.