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As a bonds time to maturity increases, the bonds sensitivity to interest rate risk: - increases...

As a bonds time to maturity increases, the bonds sensitivity to interest rate risk:

- increases

- decreases

- remains constant

- none

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Answer #1

The correct answer is increases

There exists an inverse relationship between bond prices and interest rate. This means

  • When interest rate increases bond price decreases.
  • When interest rate decreases bond price increases.

Interest rate risk means the effect of the interest rate on bond prices.

As a bonds time to maturity increases (duration), the bonds sensitivity to interest rate risk increases. Long term bonds are more volatile. This means as duration increases there will be more changes in the bond price due to the impact of interest rate.

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