Which bond has the greatest interest rate price risk?
On One Hand: Bonds with Longest Maturity Carry Greater RiskTraders use a concept called duration to calculate the price risk of a bond in response to changes in interest rates. The higher the duration of the bond, the greater the sensitivity, and hence risk, of the bond to changes in interest rates. An excellent explanation of the concept can be found at investorwords.com/1602/duration.html A bond that pays back the principal later carries greater interest rate risk than a bond with an earlier repayment schedule. Currently, the longest duration bonds are 100-year issues. One such bond was issued by the Walt Disney Corp. in 1993 and can still be bought with 83 years remaining to maturity.On the Other: Consider Interest PaymentsKeep in mind that a bond’s duration is not only determined by the date of principal repayment. Scheduled interest payments, such as annual or quarterly payments, reduce the bond’s duration and make the investment less sensitive to fluctuations is interest rates.
