Question 4 [3 points]

You hear on TV a financial advisor making the following statement:

Given the current uncertainty in the interest rates e.g. increase/decrease of Fed rates , investing in long-term bonds is not good idea for investors concerned with the price volatility of their portfolio. They should better invest in short-maturity bonds if the goal is to minimizing price swings following changes in yields.

The advisor has in mind sudden increases or decreases about the interest rates.

2. Why is the statement not completely right? Explain what the advisor might be missing. [2 points]