Which of the following statements is true?
A) Long-term bonds have lower price volatility than short-term bonds of similar risk.
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 riskier than long-term bonds.
D) Interest rate risk decreases as maturity increases.

Question

Quizplus · Accepted Answer

This is one of the fundamental principles of bond investing. As interest rates move, bond prices will move in the opposite direction. This is because the fixed payment stream from a bond becomes more valuable (and therefore commands a higher price) when interest rates are lower, and less valuable (and therefore commands a lower price) when interest rates are higher. The other statements are incorrect. Long-term bonds typically have higher price volatility than short-term bonds, short-term bonds are generally less risky than long-term bonds, and interest rate risk increases as maturity increases.

Which of the Following Statements Is True