Which investment would typically be most sensitive to changes in interest rates?

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Multiple Choice

Which investment would typically be most sensitive to changes in interest rates?

Interest-rate risk drives how much a bond’s price moves when rates change. The key measure here is duration—the longer the time to when the principal is repaid, the bigger the price swing for a given rate change. Long-term U.S. Treasury Bonds have the longest duration among the options, so their prices react most when interest rates shift. When rates rise, they fall in price more than short-term instruments; when rates fall, they rise more. Short-term Treasury bills have very short duration and thus minimal price movement; municipal and corporate bonds also react to rate changes but usually with less sensitivity than long-term Treasuries because of shorter maturities and varying credit factors. So the long-term U.S. Treasury Bonds are typically the most sensitive to changes in interest rates.

Interest-rate risk drives how much a bond’s price moves when rates change. The key measure here is duration—the longer the time to when the principal is repaid, the bigger the price swing for a given rate change. Long-term U.S. Treasury Bonds have the longest duration among the options, so their prices react most when interest rates shift. When rates rise, they fall in price more than short-term instruments; when rates fall, they rise more. Short-term Treasury bills have very short duration and thus minimal price movement; municipal and corporate bonds also react to rate changes but usually with less sensitivity than long-term Treasuries because of shorter maturities and varying credit factors. So the long-term U.S. Treasury Bonds are typically the most sensitive to changes in interest rates.

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