Chapter12: The Cost Of Capital
Section: Chapter Questions
Problem 3QTD
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Question
Why are long-term corporate bonds higher risk than short-term corporate bonds? Provide an example.
Expert Solution
1)
Longer term bonds have higher risks than short term bonds due to their duration and time period. There is a higher probability that interest rates or yields will rise in the longer term than in the shorter time period.
Example: A short term bond of 1 year might remain stable in value but a long term bond of 10 years might fall largely in value due to an interest rate increase in 7th year resulting in losses for the investor.
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