Which of the following is most sensitive to changes in Interest rate?

-Bond

-Preference Shares

-Common Shares

Please explain too, i'm a beginner. Thanks!

In general the answer is bonds because bonds are a well-defined series of payments and the value of the bond depends only on how we discount these payments, not on how reliable they are. Obviously, there are bonds out there whose payments are very unreliable and in the extreme that means they barely have any interest rate risk. And of course, both stocks and preferred are valued based on cash flows a long time in the future so they can have more interest rate risk than a short-term bond.

Unfortunately, the answer to this question is not as easy as you would like it to be. If Proctor and Gamble (highly creditworthy company) issued perpetual preferred shares (i.e., no fixed redemption date), these would be highly interest rate sensitive investments. A Rite Aid (not so creditworthy) bond with 2 years until maturity is not interest rate sensitive at all.

Which of the following is most sensitive to changes in Interest rate?

-Bond

-Preference Shares

-Common Shares

Please explain too, i'm a beginner. Thanks!