If the interest rates on all bonds rise from 5 to 6 percent over the course of the year,which bond would you prefer to have been holding?
A)a bond with one year to maturity
B)a bond with five years to maturity
C)a bond with ten years to maturity
D)a bond with twenty years to maturity

Question

Quizplus · Accepted Answer

If interest rates rise, the bond prices fall. Short-term bonds are less sensitive to interest rate changes than long-term bonds, so if interest rates go up, the price of a short-term bond will not drop as much as that of a long-term bond. Therefore, the bond to hold in this scenario is a bond with a shorter time to maturity. Choice A has the shortest time to maturity, making it the best choice.

If the Interest Rates on All Bonds Rise from 5