Which of the following statements is true?
A) For a given change in market interest rates, the prices of higher-coupon bonds change more than the prices of lower-coupon bonds.
B) If market interest rates rise, a 1-year bond will fall in value more than a 10-year bond.
C) If interest rates rise, bond prices will rise.
D) If market interest rates rise, a 10-year bond will fall in value more than a 1-year bond.

Question

Quizplus · Accepted Answer

If market interest rates rise, a bond's value will decrease. Bonds with longer maturities will be affected more than bonds with shorter maturities because investors are tying up their money for a longer period of time and are therefore exposed to more interest rate risk. Therefore, a 10-year bond will fall in value more than a 1-year bond. A is incorrect as the opposite is true. B is also incorrect as a longer-term bond will be more affected by the rise in market interest rates. C is incorrect as bond prices and interest rates have an inverse relationship.

Which of the Following Statements Is True