Final answer:
The correct option is B, as the price of a bond is more sensitive to changes in yield to maturity the longer its time until maturity due to the present value of money. This illustrates the fundamental relationship between interest rates and bond prices.
Step-by-step explanation:
A student asked how a change in yield to maturity affects a bond's price, and the correct answer is, 'B. The longer the time until a bond matures, the greater will be the change in its price.'
Bonds are financial instruments used by organizations to raise capital, often as an alternative to bank loans. A bond's face value, or par value, is the amount promised to be paid back to the investor at maturity, along with periodic interest payments, known as the bond's coupon rate. However, the market value of a bond can fluctuate based on changes in prevailing interest rates.
If the market interest rates rise, the bond's price falls; conversely, if rates fall, the bond's price increases. This inverse relationship is more pronounced the longer a bond's time to maturity. This effect is due to the present value of money—longer durations until maturity mean more time for differences in coupon payments and prevailing rates to impact the bond's value.