Products & Their RisksQuestion 55 of 398
Compared with a long-term bond, a short-term bond of the same issuer generally has:
a.Higher interest-rate risk and higher inflation risk
b.Higher interest-rate risk but lower reinvestment risk
c.Lower interest-rate risk but higher reinvestment risk
d.Identical risk in every category
Explanation
Short-term bonds have less price sensitivity to rate changes (lower interest-rate risk) but must be reinvested sooner, exposing the investor to more reinvestment risk. Longer bonds show the opposite trade-off, so the risks are not identical.
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