Which bond would best satisfy an investor looking to minimize interest rate and default risks?

To minimize both interest rate risk and default risk, choosing a bond with the highest credit quality and a shorter maturity is optimal. In this case, the correct answer is a AAA bond with 5 years to maturity.

Let's break down the components:

1. Interest Rate Risk: This type of risk relates to the sensitivity of a bond's price to changes in interest rates. Typically, the longer the maturity, the greater the exposure to interest rate fluctuations. A shorter maturity bond, like the AAA bond with 5 years to maturity, is less sensitive to interest rate changes, making it a safer choice for investors concerned about interest rate risk.

2. Default Risk: This is the risk that the bond issuer will not be able to make the required payments. The AAA rating indicates that the bond is of the highest quality, signifying that there is a very low risk of default. In contrast, a BBB bond, whether it has 10 years to maturity or is perpetual, carries a higher risk of default compared to an AAA bond.

Combining these two factors, the AAA bond with a 5-year maturity presents the least risk overall. It reduces both the likelihood of the bond losing value due to rising interest rates and minimizes the risk