Question

Which of the following statements is​ false?

A.The sensitivity of a​ bond's price changes in interest rates is the​ bond's duration.
B.When a bond is trading at a​ discount, the price increase between coupons will exceed the drop when a coupon is​ paid, so the​ bond's price will rise and its discount will decline as time passes.
C.Prices of bonds with lower durations are more sensitive to interest rate changes.
D.Coupon bonds may trade at a​ discount, at a​ premium, or at par.

Answer 1

The false statement is C. Bond prices are inversely related to their duration.

Step-by-step explanation:

The false statement is C.

The price of a bond is inversely related to its duration. This means that bonds with lower durations are less sensitive to changes in interest rates. As a result, prices of bonds with lower durations are less likely to be affected by interest rate changes.

For example, let's say there are two bonds. Bond A has a duration of 5 years and Bond B has a duration of 10 years. If interest rates increase by 1%, the price of Bond A will decrease by 5% while the price of Bond B will decrease by 10%.

Therefore, statement C is false because prices of bonds with lower durations are less sensitive to interest rate changes.