ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Therefore, bonds with longer maturities generally have higher interest rate risk than similar bonds with shorter maturities. to compensate investors for this interest rate risk, long-term bonds generally offer higher coupon rates than short-term bonds of the same credit quality.

Detailed explanation-2: -Longer-term bond funds typically offer higher yields but also greater risk. The risk stems from interest rates, which are affected by inflation. This risk is called interest rate risk.

Detailed explanation-3: -The reason: A longer-term bond carries greater risk that higher inflation could reduce the value of payments, as well as greater risk that higher overall interest rates could cause the bond’s price to fall. Bonds with maturities of one to 10 years are sufficient for most long-term investors.

Detailed explanation-4: -There are two primary reasons why long-term bonds are subject to greater interest rate risk than short-term bonds: There is a greater probability that interest rates will rise (and thus negatively affect a bond’s market price) within a longer time period than within a shorter period.