Question

The price sensitivity of a bond to a given change in interest rates generally lower than the longer the bonds remaining maturity because short-term rates are more volatile than long-term rates. true or false

Answer 1

Long term bonds are more sensitive to interest rate changes . This is mainly due to the fixed income nature of bonds. This concept can be further clarified with Convexity and Duration of bonds. Longer term bonds are exposed to a larger probability that the rates will change over its remaning duration. Hence longer term bonds are more sensitive to interest rate changes. With change in short term rates the money can be changed and reinvested at the new interest rates which is not the same case for long term bonds as they are locked in for a longer duration.

Answer is False