Canadian Securities Course (CSC) Level 2 Practice Exam

What do short-term fixed income investments offer in terms of volatility?

1. High volatility

2. Medium volatility

3. Low volatility

4. Unpredictable volatility

The correct answer is: Low volatility

Short-term fixed income investments are generally characterized by low volatility. This is primarily due to their nature of being less sensitive to interest rate changes compared to long-term investments. Since they are issued for shorter maturities, the price fluctuations in response to interest rate movements are minimized. Investors tend to perceive these investments as safer and more stable, which contributes to their low level of volatility. Additionally, the shorter time frame before the investment matures means that any shifts in interest rates will have less time to impact the investment's value significantly. Therefore, when looking at the risk profile of short-term fixed income securities, they are attractive to conservative investors who wish to preserve capital while earning some yield without exposing themselves to substantial price swings.