Which ONE of the following statements is true?
A) Long-term bonds have lower price volatility than short-term bonds.
B) As interest rates decline, the prices of bonds rise; and as interest rates rise, the prices of bonds decline.
C) All other things being equal, short-term bonds are more risky than long-term bonds.
D) Interest rate risk decreases as maturity increases.

Question

Quizplus · Accepted Answer

This statement, known as the interest rate risk, is a fundamental concept in bond investing. As interest rates decline, the prices of bonds rise, and as interest rates rise, the prices of bonds decline. This is because when interest rates rise, newly issued bonds offer higher yields than older bonds, making them more attractive to investors. As a result, the prices of older, lower-yielding bonds decline to compete with the newer bonds. Conversely, when interest rates decline, older bonds that offer higher yields become more attractive to investors, leading to an increase in demand and higher prices. The other statements are incorrect.

Which ONE of the Following Statements Is True