Question

Answer the following question based on your understanding of interest rate risk and reinvestment risk.

Assuming all else is equal, the shorter a bond’s maturity, the more its price will change in response to a given change in interest rates.
(A) True
(B) False

Answer 1

False

Step-by-step explanation:

As we know that the bonds whose time to maturity is greater are suspected to more risks therefore their price variation will be higher.

On the other hand we may say that, a bond having lower time to maturity will be subjected to lower risks therefore their price change will also be lower.

Therefore we may conclude that there is a directly proportional relationship between time to maturity of a bond and associated risks.

Thus it is clear that bond subjected to more risks will face higher price changes. so the given statement which states that bond having shorted time to maturity will face more price changes given a same change in interest rates is false.