Bonds
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What is the relationship between maturity, risk and interest rates?
Generally the longer the maturity of a bond, the higher the risk associated with it, and hence the higher
the interest rate the bond will pay. A higher interest rate compensates investors for taking on the greater
risk.
Longer maturities entail higher risk because most bonds lock in an interest rate at issue. If interest rates
rise before the bond matures, you are stuck holding a bond that is paying less than other newer bonds are
paying. So you either must settle for lower interest, or sell the bond at a loss. In addition to interest
rate risk, bonds with longer maturities also carry credit risk, since the fortunes of the company issuing
the bond may change over time.
Bonds with intermediate and short terms pay lower rates, because the overall risks are less.