Determine whether the below statements are true or false. I. Bond prices are inversely related to...

Determine whether the below statements are true or false. I. Bond prices are inversely

related to interest rates. II. The smaller a bond’s duration, the greater its interest-rate

risk.

(a) Both are true.

(b) I is true, II false.

(d) Both are false.

justify answer

Solutions

Expert Solution

b.I is true, II false.

Bond prices are inveresely related to interest rates, which means high interest rates will result in low price of the bond, low interest rates will result in high price of the bond.

The smaller a bond's duration, the lesser is its interest rate risk, which means the a bond with lesser duration will vary at a lower rate to the interest rate changes than the one with higher duration.

jeff jeffy answered 2 years ago

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