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 to 7%.
A) Both bonds rise in value but Brittany's rises more.
B) Both bonds rise in value but Christina's rises more.
C) Both bonds fall in value but Brittany's falls more.
D) Both bonds fall in value but Christina's falls more.

Question

Quizplus · Accepted Answer

When interest rates (yields) rise, the value of existing bonds falls because new bonds are issued at the higher rate, making the older, lower-yielding bonds less attractive. Bonds with longer maturities, like Christina's 5-year bond, are more sensitive to interest rate changes and therefore fall more in value compared to bonds with shorter maturities, like Brittany's 2-year bond.

Brittany and Christina Both Buy Bonds with Yield to Maturity