Which of the following statements about the relationship between interest rates and bond prices is true?
A)There is an inverse relationship between bond prices and interest rates, and the price of long-term bonds fluctuates more than the price of short-term bonds for a given change in interest rates (assuming that the coupon rate is the same for both).
B)There is an inverse relationship between bond prices and interest rates, and the price of short-term bonds fluctuates more than the price of long-term bonds for a given change in interest rates (assuming that the coupon rate is the same for both).
C)There is a direct relationship between bond prices and interest rates, and the price of short-term bonds fluctuates more than the price of long-term bonds for a given change in interest rates (assuming that the coupon rate is the same for both).
D)There is a direct relationship between bond prices and interest rates, and the price of long-term bonds fluctuates more than the price of short-term bonds for a given change in interest rates (assuming that the coupon rate is the same for both).

Question

Quizplus · Accepted Answer

There is an inverse relationship between bond prices and interest rates because as interest rates increase, the present value of the future cash flows generated by the bond decreases, and vice versa. Additionally, the price of long-term bonds fluctuates more than the price of short-term bonds for a given change in interest rates because long-term bonds have a higher sensitivity to changes in interest rates due to their longer maturity.

Which of the Following Statements About the Relationship Between Interest