Question

If interest rates decline, which would you rather be holding, long-term bonds or short-term bonds? Why? Which type of bond has the greater interest-rate risk?

Short answer

In such a situation, long term investment will be a better option.

Step-by-step solution

Step 1. Introduction

An interest rate indicates how much it costs to borrow money or how much it pays to save money. So, if you're a borrower, the interest rate is the cost of borrowing money expressed as a percentage of the entire loan amount.

Step 2. Explanation

Long-term bonds would be a better investment since their price would rise faster than short-term bonds, offering you a bigger return. Longer-term bonds are more vulnerable to price swings than shorter-term bonds, posing a higher risk of interest rate fluctuations.