A fall in interest rates will cause long-term bond prices to
A) fall less than short-term bond prices.
B) fall more than short-term bond prices.
C) rise less than short-term bond prices.
D) rise more than short-term bond prices.

Question

Quizplus · Accepted Answer

When interest rates fall, bond prices rise because the fixed interest payments of existing bonds become more attractive compared to the new bonds issued at the lower rates. Long-term bonds are more sensitive to interest rate changes than short-term bonds, so their prices rise more in response to a decrease in rates.

A Fall in Interest Rates Will Cause Long-Term Bond Prices