Question

Which of the following relationships does NOT hold in the pricing of fixed-rate assets given changes in market rate? Select one: a. A decrease in interest rates generally leads to an increase in the value of assets. b. Longer maturity assets have greater changes in price than shorter maturity assets for given changes in interest rates. c. The absolute change in price per unit of maturity time for given changes in interest rates decreases over time, although the relative changes actually increase. d. For a given percentage decrease in interest rates, assets will increase in price more than they will decrease in price for the same, but opposite increase in rates. e. None of the options. Clear my choice

Answer 1

The correct answer is the third option i.e. option c. The absolute change in price per unit of maturity time for given changes in interest rates decreases over time, although the relative changes actually increase.

Rest all the options are true. As interest rate decreases, the price of a fixed-rate assets (say a bond for example) increases. Higher maturity assets have higher duration and hence higher % change in the price for a given %age change in interest rate.