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11 September, 09:33

A financial adviser has just given you the following advice: "Long-term bonds are a great investment because their interest rate is over 20%." Is the financial adviser necessarily right?

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Answers (2)
  1. 11 September, 09:44
    0
    No

    Explanation:

    Long term bonds might not be great investments if the interest rate fall or even slide into negative value in the future. This means that the bond will become insignificant in value.

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  2. 11 September, 09:57
    0
    No

    Explanation:

    Determining how great an investment is dependent on more that just its interest rate. Apart from the tenor (time to maturity) and the interest rate mentioned in the question, one prominent factor to consider in determining how great a bond is is its risk.

    Risk: irrespective of the interest rate of a bond, a riskier bond (issued by a company with a rating less than investment grade) are not considered as great an investment as sovereign bonds (issued by governments). This riskiness of a bond is usually measured by its credit rating.

    As such, the financial adviser may be wrong in saying long term bonds are great because of the interest rate of 20% without considering the risk involved in investing in the bond.
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