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Interest Rate Risk Between Long-Term and Short-Term Bonds
By CHRIS GALLANT Updated Jan 11, 2021
TABLE OF CONTENTS
- Interest Rates and Duration
- How Interest Rate Risk Impacts Bonds
- How Investors Can Reduce Interest Rate Risk
- The Bottom Line
Long term bonds are most sensitive to interest rate changes. The reason lies in the fixed-income nature of bonds: when an investor purchases a corporate bond, for instance, they are actually purchasing a portion of a company’s debt. This debt is issued with specific details regarding periodic coupon payments, the principal amount of the debt and the time period until the bond’s maturity.
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Order Paper NowHere, we detail why it is that bonds with longer maturities expose investors to greater interest rate risk than short-term bonds.
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