Question

I am stuck on the follow up question.

This is the original questions.

Discuss how the bond market reacts when the Federal Reserve increases short term interest rates. How do short-term versus long-term bond prices react? How do Treasury bonds versus corporate bonds behave?

Follow up:

Rates are low within the Market. When you look to invest $10,000 (can't use it to pay bills), where do you put your money and why?

Answer 1

Bond market will be reacting negatively when the Federal Reserve will be increasing the short-term interest rates because it will be leading to decrease in the prices of the bonds because price of the bond and interest rates are negatively related

Long term bonds will be getting affected more because they will be losing their attractiveness due to high maturity and low coupons and when the interest rates in market will go up in these bonds are no longer preferable. Treasury bonds are often providing with a lower rate of interest and they will be behaving negatively whereas corporate bonds are generally providing with higher yield and it will mean that they will be getting affected to a lower extent because they are offering with higher rate of interest

I will be trying to put money into the treasury bonds because when the rates are lower it will mean that there is a risk related to recession in the economy and I will be trying to to protect myself through United States treasury bills or treasury bonds.