Because short-term interest rates are much more volatile than long-term rates, an investor would, in the real world, be subject to much more interest rate price risk if he or she purchased a 30-day bond than if he or she bought a 30-year bond

A. True

B. False

B. False

Explanation:

Bonds are fixed income securities wherein the issuer raises long term capital and agrees to pay a fixed rate of coupon payments and repayment of principal on maturity to the lenders.

Interest rates and bond prices are inversely related in the sense that if interest rates rise, bond prices fall and vice versa.

Interest rate risk is more prominent in bonds with longer duration than the bonds of the shorter duration, with few coupon payments left.

2 factors are responsible for long term duration bonds being exposed to greater interest rate risk, namely,

There is a higher probability of a rise in the market rate of interest in case of long term duration bonds simply since interest rate change is a gradual change and thus, the probability of it's occurrence will be more profound in case of long duration bonds. Longer duration. The bonds with longer duration and with many coupon payments outstanding till maturity will represent a greater loss to an investor w. r. t a short term duration bond with merely a single coupon payment outstanding, when interest rates rise. The higher the duration, the greater will be the impact of a change in the interest rate.