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Which of the following statements is correct? a. Ignoring interest accrued between payment dates,...

Question:

Which of the following statements is correct?

a. Ignoring interest accrued between payment dates, if the required rate of return on a bond is less than its coupon interest rate, and rd remains below the coupon rate until maturity, then the market value of that bond will be below its par value until the bond matures, at which time its market value will equal its par value.

b. Assuming equal coupon rates, a 20-year original maturity bond with one year left to maturity has more interest rate risk than a 10-year original maturity bond with one year left to maturity

c. Regardless of the size of the coupon payment, the price of a bond moves in the same direction as interest rates; for example, if interest rates rise, bond prices also rise.

d. For bonds, price sensitivity to a given change in interest rates generally increases as years remaining to maturity increases.

e. Because short-term interest rates are much more volatile than long-term rates, you would, in the real world, be subject to more interest rate risk if you purchased a 30-day bond than if you bought a 30-year bond.

Bond Interest Rate Risk:

A bond's interest rate refers to the fluctuation in bond price when market interest rate changes. A measure of bond interest rate is bond duration. The longer the duration, the higher the interest rate risk.

Answer and Explanation:

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The answer is d.

All else the same (i.e., coupon rate, market interest rate, par value), a bond with a longer term to maturity will have a longer...

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Interest Rate Risk: Definition, Formula & Models

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Chapter 3 / Lesson 6
12K

Interest rate risk is really the risk of two different events (price reduction and reinvestment rate reduction) caused by a change in interest rates. Interest rate risk affects bond investments, but the good news for bond investors is that it can be mitigated or eliminated.


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