A decrease in interest rates will
A)decrease the bond's PV.
B)increase the bond's duration.
C)lower the bond's coupon rate.
D)change the bond's payment frequency.
E)not affect the bond's duration.

Question

Quizplus · Accepted Answer

A decrease in interest rates increases a bond's duration because the present value of the bond's future cash flows becomes more sensitive to changes in interest rates. Duration measures this sensitivity, so as interest rates fall, the duration extends, indicating a higher interest rate risk.

A Decrease in Interest Rates Will