Which of the following statements is true?
A) For a given change in market interest rates, the prices of higher-coupon bonds change more than the prices of lower-coupon bonds.
B) If market interest rates rise, a 1-year bond will fall in value more than a 10-year bond.
C) If market interest rates rise, bond prices will rise.
D) If market interest rates rise, a 10-year bond will fall in value more than a 1-year bond.

Question

Quizplus · Accepted Answer

When market interest rates rise, the prices of all bonds will generally fall. However, longer-term bonds are more sensitive to changes in interest rates because they have more future cash flows that could be impacted by changes in interest rates. Therefore, a 10-year bond will fall in value more than a 1-year bond when market interest rates rise. Choices A and C are incorrect because higher-coupon bonds are generally less sensitive to changes in interest rates than lower-coupon bonds, and bond prices will generally fall when market interest rates rise. Choice B is also incorrect because a longer-term bond will fall in value more than a shorter-term bond when market interest rates rise.

Which of the Following Statements Is True