However government tried hard to stimulate the investment

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Reference no: EM13617443

Interest rate varied in different maturities of bond because whether you have a good yield is depending on the type of bonds you are going to buy. Generally, the holder of long-term bonds has the greater risk of inflation that can reduce the value of payments. In the long run, this greater risk which means higher overall interest rates could cause the bond's price to fall. From the side of the short term bonds, it usually indicates that it will mature in one to three years. For limited amount of time, the interest rate risk that will cause the principal value of bonds decline if we compared to intermediate-term bond funds (shows in figure 6.4 of textbook).

The graph of 6.4 in textbook shows the change of interest rate over last 30-40years. In 1980's, all the interest rates kept high level. In 2000's, the rates was much lower than 1980's.and then in 2011's, the interest rate almost hit the bottom of line. I think the interest rate risk is still a bigger problem for today's bond investor because they want to earn profit from investing. However, for today's economic situation with government participation, investors are much more careful to dig into the reasons for change in interest rate.

Apparently, in today's market, the market risk is not only relevant risk. The market behavior should be developing without government control if the interest rate is in the equilibrium. However, government tried hard to stimulate the investment. For example, they buy long term bonds back to push interest rates artificially up. Inversely, this behavior declines the value of long term bond. As investors, they are not happy about this.

Reference no: EM13617443

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