Which of the following is not true about bonds? In all of the statements,assume other things are held constant. A) Price sensitivity,that is,the change in price due to a given change in the required rate of return,increases as a bond's maturity increases. B) For a given bond of any maturity,a given percentage point increase in the interest rate (r_d)causes a larger dollar capital loss than the capital gain stemming from an identical decrease in the interest rate. C) For any given maturity,a given percentage point increase in the interest rate causes a smaller dollar capital loss than the capital gain stemming from an identical decrease in the interest rate. D) From a borrower's point of view,interest paid on bonds is tax-deductible. E) A 20-year zero-coupon bond has less reinvestment rate risk than a 20-year coupon bond.

Question

Quizplus · Accepted Answer

Statement B is incorrect because for a given bond, a percentage point increase in interest rates causes a smaller dollar capital loss than the capital gain from an identical decrease in interest rates, due to the convexity of bond prices.

Which of the Following Is Not True About Bonds? in All