A) The values of outstanding bonds change whenever the going rate of interest changes. Generally speaking, short-term interest rates are much more volatile than long-term interest rates. With that, short-term bond prices are more sensitive to interest rate changes than are long-term bond prices.
Is this true or false? Explain in your own words without references and with detail (150 words).
B) What if you owned a portfolio consisting of $250,000 worth of long-term U. S. government bonds.
Would your portfolio be considered risk-less?
What if you hold a portfolio consisting of $250,000 worth of 30-day Treasury bills. Every 30 days your bills mature and you reinvest the principal ($250,000) in a new batch of bills. Presume that you live on the investment income from your portfolio and that you want to maintain a consistent standard of living. Is your portfolio truly risk-less?
Can you think of any asset that would be completely risk-less? Could someone create such an asset? Explain in your own words without references and with detail (150 words).
The solution explains the relationship between interest rates and value of bonds and how to get a riskless portfolio