If interest rates increase because of a previously unanticipated inflation rate risk:
A) long-lived debt instruments will decline more than short-lived debt instruments
B) long-lived debt instruments will decline less than short-lived debt instruments
C) neither set of debt instruments will decline
D) all other things being equal, both should decline equally

Question

Quizplus · Accepted Answer

Long-lived debt instruments are more sensitive to interest rate changes than short-lived debt instruments. An increase in interest rates due to inflation risk will lead to a decrease in the present value of the cash flows associated with long-lived debt instruments, causing them to decline more than short-lived debt instruments.

If Interest Rates Increase Because of a Previously Unanticipated Inflation