A drop in interest rates
A) Affects the prices of short-term securities more than long-term securities
B) Affects the prices on short-term securities less than long-term securities
C) Affects the prices of short-term securities the same as long-term securities
D) Cannot affect prices of securities

Question

Quizplus · Accepted Answer

A drop in interest rates affects the prices of long-term securities more than short-term securities because the present value of their longer-term cash flows increases more significantly. This is due to the inverse relationship between bond prices and interest rates, and the fact that longer-term bonds have more future payments that are discounted back to their present value at the new, lower interest rate.

A Drop in Interest Rates