Answer:
d. a greater interest rate price risk on a long-term bond than on a short-term bond.
Explanation:
A bond can be defined as a debt or fixed investment security, in which a bondholder (investor or creditor) loans an amount of money to the bond issuer (government or corporations) for a specific period of time. The bond issuer are expected to return the principal (face value) at maturity with an agreed upon interest (coupon), which are paid at fixed intervals.
Generally, most bonds with shorter maturity time respond less dramatically to changes in interest rates when compared to bonds having longer maturity.
This ultimately implies that, the risk associated with short bonds isn't really significant because their interest rates are less likely to change substantially within that short period of time unlike bonds with longer maturity.
Yield to maturity can be defined as the bond's total rate of return required by the secondary market while the coupon rate is defined as the annual interest of a bond divided by its face value.
For example, when a bond is issued at a par or face value of €1,000, at maturity the investor would be paid €1,000. But because bonds are being sold before its maturity, it would trade below its face value.
All else being equal (ceteris paribus), an increase in the yield to maturity of a bond will result in a greater interest rate price risk on a long-term bond than on a short-term bond.
An interest-rate risk can be defined as the risk associated with bond owners due to fluctuating interest rates. This risk has a direct level of impact on the value of fixed income securities such as bonds.
