An equal decrease in all bond interest rates
A)increases the price of a five-year bond more than the price of a ten-year bond.
B)increases the price of a ten-year bond more than the price of a five-year bond.
C)decreases the price of a five-year bond more than the price of a ten-year bond.
D)decreases the price of a ten-year bond more than the price of a five-year bond.

Question

Quizplus · Accepted Answer

A decrease in interest rates leads to an increase in bond prices. However, a ten-year bond is more sensitive to interest rate changes than a five-year bond. This is because the ten-year bond has a longer maturity, and therefore, a greater uncertainty about future interest rates. As a result, an equal decrease in all bond interest rates will increase the price of a ten-year bond more than the price of a five-year bond.

An Equal Decrease in All Bond Interest Rates