For the same change in interest rates bondholder's will realize:
A) a greater capital gain when rates rise than capital loss when rates fall
B) a greater capital gain when rates fall than capital loss when rates rise
C) a greater capital loss when rates rise than capital gain when rates fall
D) a greater capital loss when rates fall than capital gain when rates rise
E) the same capital gain or loss when rates rise or fall

Question

Quizplus · Accepted Answer

Bond prices and interest rates have an inverse relationship. When interest rates fall, bond prices rise, leading to capital gains for bondholders. Conversely, when interest rates rise, bond prices fall, leading to capital losses. However, due to the convexity of bond price movements, the capital gain from a decrease in interest rates is greater than the capital loss from an equivalent increase in interest rates.

For the Same Change in Interest Rates Bondholder's Will Realize