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Interest rate and value of bonds/riskless portfolio

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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).

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Solution Summary

The solution explains the relationship between interest rates and value of bonds and how to get a riskless portfolio

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