Tax & EvaluationQuestion 108 of 110
Interest rates rise sharply. Which fund would most likely experience the largest price decline?
a.A money market fund
b.A short-term bond fund with a two-year average maturity
c.A floating rate bank loan fund
d.A long-term government bond fund with a 20-year average maturity
Explanation
Interest rate risk grows with maturity and duration, so the longest-maturity portfolio suffers the largest price drop when yields rise. Money market and short-term bond funds reprice quickly and move very little. Floating rate instruments adjust their coupons upward, which cushions their prices.
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