General Securities Representative (Series 7) Practice Exam

Which maturities are generally considered to have the greatest amount of interest rate risk?

1. Longest maturities

2. Medium maturities

3. Shortest maturities

4. All maturities equally

The correct answer is: Shortest maturities

The answer emphasizing the longest maturities is grounded in the principle that bonds with longer maturities are more sensitive to changes in interest rates. When interest rates rise, the prices of existing bonds fall, and this decline in price is more pronounced for bonds with longer maturities. This increased sensitivity occurs because the longer the time until a bond matures, the longer an investor is exposed to the fluctuations in interest rates. For instance, if a bond has a maturity of 30 years, any increase in interest rates will affect the present value of its future cash flows over a longer time frame compared to a bond that matures in just a few years. As a result, investors demand a higher yield (interest rate) for longer-term bonds to compensate for this heightened risk, which illustrates that longer maturities carry more interest rate risk than shorter ones. In contrast, short maturities generally experience less interest rate risk because they will mature sooner, meaning the investor will recover their principal quickly and be less impacted by changes in rates over a shorter time period. Medium maturities fall somewhere in between but are still not as influenced by rate changes as the longest maturities. The assertion that all maturities carry equal risk overlooks the inherent differences in exposure across different time