If interest rates fall, is the price change in a bond with "t" years until maturity. Suppose there are four bonds: , , , . If the bonds are identical in every respect except for their maturity, which of the following statements is true? A) $(\Delta_2 - \Delta_4) 0$ B) $(\Delta_2 - \Delta_4) = 0$ C) $(\Delta_2 - \Delta_4) - (\Delta_{22} - \Delta_{24}) 0$ D) $(\Delta_2 - \Delta_4) - (\Delta_{22} - \Delta_{24})

Question

If interest rates fall, is the price change in a bond with "t" years until maturity. Suppose there are four bonds: , , , . If the bonds are identical in every respect except for their maturity, which of the following statements is true?
A) $(\Delta_2 - \Delta_4) > 0$
B) $(\Delta_2 - \Delta_4) = 0$
C) $(\Delta_2 - \Delta_4) - (\Delta_{22} - \Delta_{24}) > 0$
D) $(\Delta_2 - \Delta_4) - (\Delta_{22} - \Delta_{24}) < 0$

Quizplus · Accepted Answer

Longer maturity bonds are more sensitive to interest rate changes, so the price change for bonds with longer maturities will be greater. Thus, $(\Delta_2 - \Delta_4) < (\Delta_{22} - \Delta_{24})$, making the expression negative.

If Interest Rates Fall, Is the Price Change in a Bond