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.

I and II only.

I and III only.

II and III only.

I, II and III.

Answer 1

Solution

Answer-I ,II AND III

When ever the intrest rates rise the bond prices come down and whenever the intrest rates fall the bond prices increase.This direction of bond prices in opposite direction w.r.t intrest rates is called intrest rate risk

Also the longer duration bonds are most sensitive to these intrest rate changes as longer the duration more is the probability of changes in rates again.Alsdo since the number of coupon payment and the duration is shorter ,thus the impact of change in rate will be more in longer duration bonds

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