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 by the same proportion.
D) Neither bond will decrease in price, but their yields will increase.

Question

Quizplus · Accepted Answer

The longer maturity bond, which is the 20-year bond, is more sensitive to changes in interest rates than the 5-year bond. This is because the longer the maturity of the bond, the greater the risk of market fluctuations and inflation. As a result, the value of the 20-year bond will decrease more in price than the 5-year bond if interest rates suddenly increase by 2%. Therefore, choice B is the correct answer.

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