Brittany and Christina both buy bonds with yield to maturity of 4% but Brittany's bond has 2 years to maturity and Christina's has 5. After one year, yields for these bonds rise.
A) The rate of return on both bonds is above 4% but Brittany's is higher.
B) The rate of return on both bonds is above 4% but Christina's is higher.
C) The rate of return on both bonds is below 4% but Brittany's is lower.
D) The rate of return on both bonds is below 4% but Christina's is lower.

Question

Quizplus · Accepted Answer

When yields rise after the purchase of a bond, the price of the bond falls, leading to a lower rate of return than the original yield to maturity. Longer maturity bonds, like Christina's, are more sensitive to interest rate changes, resulting in a larger price drop and a lower rate of return compared to Brittany's shorter maturity bond.

Brittany and Christina Both Buy Bonds with Yield to Maturity