Which of the following are false about the interest-rate sensitivity of bonds? I) Bond prices and yields are inversely related.II) Prices of long-term bonds tend to be more sensitive to interest-rate changes than prices of short-term bonds.III) Interest-rate risk is correlated with the bond's coupon rate.IV) The sensitivity of a bond's price to a change in its yield to maturity is inversely related to the yield to maturity at which the bond is currently selling.

A) I
B) III
C) I, II, and IV
D) II, III, and IV
E) I, II, III, and IV

Question

mitesh kalara · Accepted Answer

Final Answer : B, Explanation :  Interest-rate risk is indeed correlated with the bond's coupon rate, but not in the way that suggests it is false regarding interest-rate sensitivity. Lower coupon bonds are more sensitive to interest rate changes than higher coupon bonds, which means the statement as it might be interpreted in the question could be misleading or incorrect. However, the other statements are true regarding bond sensitivity to interest rates: Bond prices and yields are inversely related (I), long-term bonds are more sensitive to interest rate changes than short-term bonds (II), and the sensitivity of a bond's price to a change in its yield is inversely related to the yield to maturity at which the bond is currently selling (IV).

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