Bond prices change whenever the market interest rate changes. In general, short-term interest rates are more volatile than long-term interest rates. Therefore, short-term bond prices are more sensitive to interest rate changes than are long-term bond prices. Is this statement true or false. Explain your answer by making up a "reasonable" example based on a 1-year and a 20-year bond to help answer the question.

Bond prices change whenever the market interest rate changes. In general, short-term interest rates are more volatile than long-term interest rates. Therefore, short-term bond prices are more sensitive to interest rate changes than are long-term bond prices. Is this statement true or false. Explain your answer by making up a "reasonable" example based on a 1-year and a 20-year bond to help answer the question.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter4: Bond Valuation

Section: Chapter Questions

Problem 2Q: Short-term interest rates are more volatile than long-term interest rates, so short-term bond prices...

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Definition Definition Calculates the present value of a bond's expected future periodic coupon payments. Bond valuation determines the theoretical fair value of a particular bond and helps investors estimate what rate of return they could expect. The bond's theoretical fair value is computed by discounting the future cash flows or coupon payments by an applicable discount rate.

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The values of outstanding bonds change whenever the going rate of interest changes. Ingeneral, short-term interest rates are more volatile than long-term interest rates. Therefore,short-term bond prices are more sensitive to interest rate changes than are long-term bond prices. Is that statement true or false? Explain. (Hint: Make up a “reasonable” examplebased on a 1-year and a 20-year bond to help answer the question.)
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