In terms of interest rate risk, which security is typically the least sensitive?

Prepare for the Canon Financial Institute CFIRS Exam with flashcards and multiple choice questions. Each question comes with hints and explanations for better understanding. Get ready to excel in your exam!

Short-term bonds are typically the least sensitive to interest rate risk due to their shorter maturity periods. Interest rate risk refers to the potential for changes in interest rates to affect the value of fixed-income securities. When interest rates rise, the prices of existing bonds generally fall, with longer-term bonds being disproportionately affected because they have a longer duration, meaning they have more time until maturity and will experience more volatility.

In contrast, short-term bonds mature sooner, which means they are exposed to interest rate fluctuations for a shorter period. As a result, when interest rates rise, the price decrease for short-term bonds is not as severe as it is for long-term bonds. Also, investors in short-term bonds can reinvest their principal sooner at new, potentially higher interest rates.

Other types of securities such as stocks and municipal bonds can also be affected by interest rate changes, but their sensitivity often varies based on different factors. Stocks may not have a direct relationship with interest rates; instead, they tend to react to broader economic conditions. Municipal bonds can have their own interest rate risk but may offer additional protective features like tax-exempt income that could influence investor decisions.

Thus, in the context of interest rate risk, short-term bonds stand out as the least sensitive option,

Subscribe

Get the latest from Examzify

You can unsubscribe at any time. Read our privacy policy