What can an investor do to reduce interest rate risk in bond investing?

Investing in shorter maturity bonds is an effective strategy for reducing interest rate risk in bond investing. Interest rate risk refers to the potential for bond prices to decline in response to rising interest rates. Generally, the longer the maturity of a bond, the greater its exposure to interest rate fluctuations. This is because longer-term bonds have more extended durations in which the investor is receiving fixed interest payments, making their prices more sensitive to changes in interest rates.

By choosing shorter maturity bonds, investors can minimize this risk. These bonds will experience less price volatility since they have fewer years before they mature, allowing the investor to recoup their principal sooner. When interest rates rise, investors holding shorter-term bonds are more likely to reinvest their funds at higher rates sooner, thus avoiding prolonged exposure to lower rates offered by longer-term bonds.

Investing in longer maturity bonds or zero-coupon bonds would indeed increase interest rate risk. Bonds with higher coupon rates might provide more income but do not inherently reduce exposure to changing interest rates. Therefore, opting for shorter maturity bonds is a prudent choice for managing the risks associated with interest rate fluctuations.