Why is it that the longer the maturity of the bond, the more it fluctuates in accordance to changes in the interest rate ? so why do longer term bonds’ interest rates drop more than short term bonds’ ?
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Money today is worth more than money tomorrow. Bonds that has longer maturity have to command a high interest return to make it attractive for investors to accept the risk. Consequently, because there is a longer horizon, interest rate fluctuations would impact the present value because you have a longer horizon to discount.
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