Which of the following statement is correct with regard to bond valuation?
A) All else equal, the longer the time to maturity, the smaller the interest rate risk.
B) All else equal, the higher the coupon rate, the greater the interest rate risk
C) Spot interest rates are yields to maturity on loan or bonds that pay multiple cash flows to the investor.
D) Bond price will fall as the market interest rate rise, as the present value of the bond's future cash flows is obtained by discounting at a higher interest rate.

Question

Quizplus · Accepted Answer

Bond price is inversely related to market interest rates. This is because a higher discount rate reduces the present value of future cash flows, resulting in a lower bond price. The other statements are incorrect. A longer time to maturity increases interest rate risk, as it exposes the bond to fluctuations in interest rates for a longer period. A higher coupon rate reduces interest rate risk, as it enhances the periodic cash flows to the investor. Spot interest rates are yields to maturity on zero-coupon bonds.

Which of the Following Statement Is Correct with Regard to Bond