Final answer:
Interest-rate risk for a coupon bond is lower when the bond's maturity date is shorter because there's less time for market interest rates to impact the bond's value.
Step-by-step explanation:
Holding other factors constant, the interest-rate risk of a coupon bond is lower when the bond's maturity date is shorter. This is because longer-term bonds have more time for interest rates to change, which could affect their value more significantly.
On the other hand, bonds with shorter maturities will soon pay back their face value, which diminishes interest-rate risk as there is less time for market interest rates to fluctuate. For example, consider a bond issued at a 5% interest rate, with an annual coupon. If market rates rise, the value of the bond decreases, because new bonds may offer higher returns.
Conversely, if market rates drop, existing bonds with higher coupons become more valuable. Nonetheless, the closer a bond is to its maturity date, the less its price tends to be affected by changes in market interest rates, thus reducing the interest-rate risk.