Question

The actual relationship between bond prices and yields is _____; if the yield declines by 1%, the bond price will increase by _____ it will fall if the yield increases by 1%.

A. convex; more than

B. convex; less than

C. linear; by the same amount

D. concave; less than

E. concave; more than

Which of the following is correct about duration?

A. Higher coupon rates mean higher duration.

B. Duration is equal to maturity for zero-coupon bonds.

C. Longer maturities mean lower duration.

D. The higher the yield, the higher the duration.

E. All of the above are true.

Answer 1

1. The actual relationship between bond prices and yields is _____; if the yield declines by 1%, the bond price will increase by _____ it will fall if the yield increases by 1%.

The answer is B as bond prices and yields have convex relationship. If the yield declines there is less than proportional impact on the bond price therefore in case of yield decline, the bond will increase by less than 1 percent.

2. The answer is E as all of the given statements are true.