Which type of bond is most affected by interest rate risk?

The type of bond that is most affected by interest rate risk is long-term debt securities, such as T bonds. These bonds typically have longer maturities, which means that they are exposed to changes in interest rates for a more extended period. When interest rates rise, the prices of existing bonds fall, particularly those with longer maturities. This is because investors can obtain a higher yield on new bonds, making the older bonds with lower rates less attractive.

T bonds specifically have maturities longer than 10 years, putting them at a greater risk when interest rates fluctuate compared to short-term securities like T bills, which have much shorter maturities and thus are less susceptible to interest rate changes. T notes, with maturities ranging from 2 to 10 years, also experience interest rate risk, but to a lesser extent compared to T bonds. ADRs, or American Depositary Receipts, are not bonds and thus do not have interest rate risk associated with them at all.

Understanding interest rate risk is crucial for managing a bond portfolio, as it highlights the importance of maturity in assessing the volatility and price sensitivity of different types of bonds.