Final answer:
The best bond for an investor seeking to minimize interest rate and default risk while investing in corporate bonds would be an AAA-rated bond with a 5-year maturity. This option provides high credit quality and lower exposure to interest rate fluctuations.
Step-by-step explanation:
If your uncle wants to reduce both interest rate risk and default risk while still investing in corporate bonds, he should choose the option that offers the highest credit quality and the shortest duration. Based on the given options, an AAA-rated bond signifies a higher credit quality and implies a lower default risk compared to a BBB-rated bond. Moreover, a shorter maturity reduces interest rate risk, as the bond is less susceptible to changes in the market interest rates over time.
Considering the mentioned criteria, the bond that best satisfies your uncle's investment preferences is the AAA-rated bond with a 5-year maturity. This bond carries a higher credit rating, indicating a lower default risk in comparison to BBB-rated bonds. Furthermore, the shorter 5-year time to maturity compared to the 10-year options helps to minimize interest rate risks.
An AAA rating by an independent rating agency such as Moody's suggests that a company is a relatively safe borrower. It is important to note that even though corporate bonds tend to offer higher yields than government bonds like Treasury notes, they come with a higher risk of default. Therefore, focusing on highly rated bonds with shorter maturities helps manage the risks while providing higher yields than safer investment options such as bank accounts.