Question

20. Which of the following is true? Select one: a. Bonds with shorter maturities have higher...

20. Which of the following is true?

Select one:

a. Bonds with shorter maturities have higher exposure to interest rate risk.

b. Bonds with higher coupons have higher exposure to interest rate risk.

c. Bond prices move in the opposite direction of interest rates.

d. Bond prices are insensitive to changes in interest rates since they are determined largely by ratings agencies such as DBRS.

e. None of the above

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Answer #1

The correct answer is option C

Bond value is the present value of all tha cash flows that the bond is going to generate over the life of the period, the interest rate is used as the discount rate to compute the present value of bond, so when the interest rate increases the present value of the cash flows gets decreased due to higher discounting while decrease in interest rate increase the bond value, therefore, option C is correct.

Bonds with longer maturity and small coupon rate has higher exposure to interest rate risk.

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