Which type of bond is most affected by interest rate risk?

Which type of bond is most affected by interest rate risk?

• A. T bills
• B. T notes
• C. T bonds
• D. ADRs

Answer: (C)

The type of bond that is most affected by interest rate risk is long-term debt securities, such as T bonds. These bonds typically have longer maturities, which means that they are exposed to changes in interest rates for a more extended period. When interest rates rise, the prices of existing bonds fall, particularly those with longer maturities. This is because investors can obtain a higher yield on new bonds, making the older bonds with lower rates less attractive. T bonds specifically have maturities longer than 10 years, putting them at a greater risk when interest rates fluctuate compared to short-term securities like T bills, which have much shorter maturities and thus are less susceptible to interest rate changes. T notes, with maturities ranging from 2 to 10 years, also experience interest rate risk, but to a lesser extent compared to T bonds. ADRs, or American Depositary Receipts, are not bonds and thus do not have interest rate risk associated with them at all. Understanding interest rate risk is crucial for managing a bond portfolio, as it highlights the importance of maturity in assessing the volatility and price sensitivity of different types of bonds.

The type of bond that is most affected by interest rate risk is long-term debt securities, such as T bonds. These bonds typically have longer maturities, which means that they are exposed to changes in interest rates for a more extended period. When interest rates rise, the prices of existing bonds fall, particularly those with longer maturities. This is because investors can obtain a higher yield on new bonds, making the older bonds with lower rates less attractive.

T bonds specifically have maturities longer than 10 years, putting them at a greater risk when interest rates fluctuate compared to short-term securities like T bills, which have much shorter maturities and thus are less susceptible to interest rate changes. T notes, with maturities ranging from 2 to 10 years, also experience interest rate risk, but to a lesser extent compared to T bonds. ADRs, or American Depositary Receipts, are not bonds and thus do not have interest rate risk associated with them at all.

Understanding interest rate risk is crucial for managing a bond portfolio, as it highlights the importance of maturity in assessing the volatility and price sensitivity of different types of bonds.