Question 1

If a bond is selling for less than its face, or maturity, value and the market interest rate remains unchanged during the life of the bond, then the price (value) of the bond will increase as the maturity date nears.

Accepted Answer

This is because the bond's yield, which is inversely related to its price, will gradually increase as the bond approaches maturity. This increase in yield will attract investors who are looking for higher returns, and therefore increase demand for the bond, causing its price to rise.

Question 2

The longer the maturity of the bond, the more significantly its price changes in response to a given change in interest rates.

Accepted Answer

This is because longer-maturity bonds have a greater sensitivity to changes in interest rates, as they are exposed to interest rate risk for a longer period of time. As interest rates change, the yield of a bond changes, which affects its price. Therefore, a bond with a longer time until maturity will have a greater change in price in response to a given change in interest rates compared to a bond with a shorter time until maturity.

Quiz 6: Bonds Debt Characteristics and Valuation

If a bond is selling for less than its face, or maturity, value and the market interest rate remains unchanged during the life of the bond, then the price (value) of the bond will increase as the maturity date nears.

The longer the maturity of the bond, the more significantly its price changes in response to a given change in interest rates.