What characteristics do financial instruments like treasury notes and bonds possess
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Answer: B. wider price fluctuations
Explanation
Longer term bonds are much more sensitive to changes in prevailing market interest rates. As market interest rates fluctuate, the present value of distant cash flows shifts significantly. This increased sensitivity leads directly to much wider price fluctuations for long term instruments. Treasury notes and bonds represent debt securities issued by the federal government with longer maturities. Bond prices and market interest rates always move in opposite directions in financial markets. Duration measures how much a bond price changes when interest rates experience a shift.
Fixed income investors must carefully evaluate duration risk before constructing long term bond portfolios. Retirement funds often match asset durations closely to liabilities to mitigate severe price volatility risks. Understanding price fluctuations helps traders capitalize on macroeconomic shifts and monetary policy announcements. Cost fluctuations are not standard terminology used when discussing the market price of fixed income securities. Shorter term treasury bills experience much smaller price changes because their maturity dates are near. Narrower price fluctuations typically characterize short term debt instruments rather than long term bonds.
- Subject
- Accounting and Finance
- Category
- Finance
- Topic
- —
- Difficulty
- medium
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