Your uncle would like to restrict his interest rate risk and his default risk,but he still would like to invest in corporate bonds.Which of the possible bonds listed below best satisfies your uncle's criteria?
A) AAA bond with 10 years to maturity.
B) BBB perpetual bond.
C) BBB bond with 10 years to maturity.
D) AAA bond with 5 years to maturity.
E) BBB bond with 5 years to maturity.

Question

Quizplus · Accepted Answer

The AAA bond with 5 years to maturity is the best choice for your uncle because it has a lower default risk (due to its high credit rating) and a shorter maturity, which helps to reduce interest rate risk. The BBB bonds have a higher default risk, and the longer maturities of both the 10-year bonds increase interest rate risk. A perpetual bond has no maturity and therefore presents an even greater interest rate risk.

Your Uncle Would Like to Restrict His Interest Rate Risk