Which of the following bonds carries the greatest amount of interest rate risk?

Question

Quizplus · Accepted Answer

The 25-year bond carries the greatest amount of interest rate risk because when interest rates change, long-term bond prices change more than those of short term bonds.
This is due to the fact that the present value of a short-term cash flow doesn't change as much as that of a more distant, long-term cash flow. Short-term cash flows are only discounted a few periods, whereas long-term cash flows are discounted over many periods.
PV = 11ea7fdb_fc03_e3a3_a768_e3275dd53048_TB2902_11 Looking at the equation for present value, we can see that when n is very large (i.e. many periods) the change in interest rates has a compounding effect and will drastically change the present value (or price) of the bond.

Which of the Following Bonds Carries the Greatest Amount of Interest