if Smith's interest rate volatility forecast turns out to be true, which bond in Exhibit 2 is likely to experience the greatest price increase?
A) Bond 2
B) Bond 3
C) Bond 4

Question

Quizplus · Accepted Answer

Bond 3 has the longest duration of the three options, making it more sensitive to changes in interest rates. If interest rates decrease, its price is likely to increase the most compared to Bond 2 and Bond 4.

If Smith's Interest Rate Volatility Forecast Turns Out to Be