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(I) Prices of shorter-maturity bonds respond more dramatically to changes in interest rates. (II) Prices and...

(I) Prices of shorter-maturity bonds respond more dramatically to changes in interest rates.

(II) Prices and returns for long-term bonds are more volatile than those for short-term bonds.

A.

(I) is true, (II) is false
B.

(I) is false, (II) is true
C.

Both are true
D.

Both are false
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Answer #1

The percentage change in Price of a bond is approximately equal to (Bond Duration multiplied by the percentage change in interest rate) The Bond price is inversely proportional to percentage change in interest rate.

A bond with high duration will change more with 1% change in interest rate than a bond with low duration. Hence Bond with long duration will have higher volatility than bond with lower duration.

Short maturity bonds have lower duration than long term bonds.

Hence,

(I) Prices of shorter-maturity bonds respond more dramatically to changes in interest rates. IS FALSE

(II) Prices and returns for long-term bonds are more volatile than those for short-term bonds. IS TRUE

B.

(I) is false, (II) is true
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