An investor holds two bonds, one with 5 years until maturity and the other with 20 years until maturity. Which of the following is more likely if interest rates suddenly increase by 2%?
A) The 5-year bond will decrease more in price.
B) The 20-year bond will decrease more in price.
C) Both bonds will decrease in price similarly.
D)Neither bond will decrease in price, but their yields will increase.

Question

Quizplus · Accepted Answer

Generally, longer-term bonds are more sensitive to changes in interest rates, meaning they will decrease in price more than shorter-term bonds. Therefore, the 20-year bond is more likely to decrease in price by a larger amount than the 5-year bond.

An Investor Holds Two Bonds, One with 5 Years Until