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 yields will increase.

Question

Quizplus · Accepted Answer

Bonds with longer maturities are more sensitive to changes in interest rates, so the 20-year bond is more likely to decrease more in price than the 5-year bond. This is because the longer a bond's maturity, the greater the uncertainty about its future cash flows and the greater the risk that rising interest rates will decrease the present value of those future cash flows.

An Investor Holds Two Bonds,one with 5 Years Until Maturity