Question

If market interest rates decline A. shortminusterm bonds will rise in value more than longminusterm bonds. B. longminusterm bonds will rise in value more than shortminusterm bonds. C. longminusterm bonds will decline in value more than shortminusterm bonds. D. shortminusterm bonds will decline in value more than longminusterm bonds.

Answer 1

long-term bonds will rise in value more than short-term bonds.

Step-by-step explanation:

There is an inverese relationship between the price of bonds and interest rates. Since the market interest rate has increased, the value of both short term and long term bonds would go down. Long term bonds carry greater interest rate risk, since the number of fixed coupon payments is more in case of such bonds as compared to short term bonds. Such long term bonds would therefore become less attractive to investors as market rates of interest are higher than the fixed interest payments resulting in a decline in the value.

Long term bonds are more sensitive to interest rates than short term ones, all other factors being constant