If the yield curve is flattening for longer term bonds, would you invest in a more short term bond or a longer term bond?
- GA41Lv 710 months ago
A short-term bond. You should be paid a higher yield for the added risk you assume in buying a long-term bond. As the yield of the long term bond approaches the yield of the short-term bond, the premium you are paid for assuming the risk of a long-term bond diminishes. You do not want to assume any risks which you are not being paid a premium to carry.
However, future interest rates affect your decision. If you think the interest rates are going to decrease, then you would want to lock-in the higher yield by holding the long-term bond. However, the reason the yield curve is flattening is affected by what investors think will happen to interest rates. So I think you would still go with the short -term bond.
- zman492Lv 710 months ago
If interest rates were low, as they are now, I would invest in a more short term bond.