Question

Which of the following statements regarding bond prices and market interest rates are most likely to be true?

1. Bond prices and market interest rates will move in the opposite direction.
2. Interest rate risk can be described as the changes in market interest rates that will cause fluctuations in a bond’s price.
3. The prices of long-term bonds display greater price sensitivity to interest rate changes than do the prices of short-term bonds.

Group of answer choices

I and II only.

I and III only.

II and III only.

I, II and III.

Answer 1

Answer:

I, II and III.

The primary pricipal of bond investment is that the bond prices and the interest rates are inversely proportional to each other i.e. they tend to move in opposite directions.

Interest rate risk can be defined as the change in the overall market interest rate that will reduce the value of the bond.

Long term bonds are more sensitive to interest rate changes as compared to the short term bonds. This is due to the fixed income nature of the bonds.