Question

Short-term bonds are generallya. less risky than long-term bonds and so they feature higher interest rates.b. less risky than long-term bonds and so they feature lower interest rates.c. more risky than long-term bonds and so they feature higher interest rates.d. more risky than long-term bonds and so they feature lower interest rates

Answer 1

B. less risky than long-term bonds and so they feature lower interest rates.

Step-by-step explanation:

short term bonds are less risky than long term bonds as interest rates are less likely to significantly change in the short term. Holders of longer term bonds have to consider the possibility of an increase in inflation which may reduce the value of expected inflows. An increase in Interest rates would also have a negative effect on the value of the bond. Due to this higher risk, long term bonds have higher interest rates compared to short term bonds.