Question

explain why if interest rates increase after a bond issue, the bond’s price will decline and the yield to maturity will increase.  Explain how the time to maturity impacts the extent to which interest rate changes impact the bond’s price.

Additionally, assume that you have a short investment horizon (less than 1 year). You are considering two investments: a 1-year Treasury security and a 20-year Treasury security. Explain why the longer-term Treasury security would be considered riskier than the shorter-term Treasury security.

Answer 1

There has a inverse relationship in the Interest rate and bond price. If the interest rate of the bond over the period has been increased it means Bond price have been decresed over that period and if the interest rate of the bond over the period has been decreased it means Bond price have been increase over that period and this shows the inverse relationship.

In most of the cases the Bond price varry with Market sentiments and economic environment.

Mostly Bonds are issued by the company as its par value and in the seconadary market it varrying with every market condition or Fluctuate.

Bonds are take to be risk Free item in the market it does not affect whether these bonds have long time maturity or short time maturity. Bonds have mostly says inverse relationship of which interest rate of the bond over the period has been increased it means Bond price have been decresed over that period and if the interest rate of the bond over the period has been decreased it means Bond price have been increase over that period.

The Treaury security are deemed to be risk free security whether they are short term like for one year or whether they are long term (twenty years). It have no risk. Because it gives normal interest like fixed deposit and any other manner.

So  Treaury security are Considered to be risk free security. It has no impact on his time period of maturity.