Assume that interest rates exhibit an unexpected increase of 1%, in general, we
ID: 2714743 • Letter: A
Question
Assume that interest rates exhibit an unexpected increase of 1%, in general, we would expect bond prices to ________. However, we would likely see that the price change of ________ time-to-maturity bonds be greater than the price change of ________ time-to-maturity bonds due to coupon repayment uncertainty.
Decrease, Longer, Shorter
Decrease, Shorter, Longer
Increase, Longer, Shorter
Increase, Shorter, Longer
a.Decrease, Longer, Shorter
b.Decrease, Shorter, Longer
c.Increase, Longer, Shorter
d.Increase, Shorter, Longer
Explanation / Answer
Assume that interest rates exhibit an unexpected increase of 1%, in general, we would expect bond prices to Decrease. However, we would likely see that the price change of Longer time-to-maturity bonds be greater than the price change of Shorter time-to-maturity bonds due to coupon repayment uncertainty.
(Bond prices and interest rates have inverse relationship. If the required rate rises bond price will decrease and if the interest rates decreases bond prices will increase.)