Question

bond a has 20 years to maturity while bond b has 5 years to maturity. bond a and bond b have the same coupon rate. in addition, bond a and bond b have the same yield-to-maturity. given this information, if interest rates increase, then the price of bond a will decrease more than the price of bond b. group of answer choices true false

Answer 1

When interest rates increase, bond prices decrease. Bond A, with a longer maturity period, will be more affected by the interest rate increase compared to bond B. Therefore, the statement is true.

Step-by-step explanation:

In general, when interest rates increase, bond prices decrease. This is because when interest rates go up, newly-issued bonds will pay higher interest rates to attract buyers. As a result, existing bonds with lower coupon rates become less valuable.

Given that bond A has a longer maturity period of 20 years compared to bond B with 5 years, bond A will be more affected by the interest rate increase. The longer time to maturity means that bond A's cash flows are spread over a longer period of time, making its price more sensitive to changes in interest rates.

Therefore, the statement is true. The price of bond A will decrease more than the price of bond B if interest rates increase.