Which of the following statements about the relationship between interest rates and bond prices is true? I) There is an inverse relationship between bond prices and interest rates. II) There is a direct relationship between bond prices and interest rates. III) The price of short-term bonds fluctuates more than the price of long-term bonds for a given change in interest rates. (Assuming that coupon rate is the same for both) IV) The price of long-term bonds fluctuates more than the price of short-term bonds for a given change in interest rates. (Assuming that the coupon rate is the same for both)

The relationship between bond prices and interest is an inverse one. This is because bonds have fixed rates so when for instance interest rates increase, the fixed rate of bonds will become less attractive as people would want to make the higher interest. They will therefore demand less of bonds and the prices will drop. The reverse is true.

Also, long term bonds are more affected by interest rate changes then short term bonds. This is because, as they have a longer term till maturity, they will be even less attractive when interest rates rise.

PiaDeveau PiaDeveau · Answer 2 · 2021-11-25T12:07:34+01:00

Because the coupon rate is fixed, if the necessary rate rises, the bond price falls, and vice versa.

When interest rates vary, the value of long-term bonds fluctuates more than the value of short-term bonds. This is due to the bond's convex hull.

The price of a bond as well as the rate of interest have an inverse relationship.

So, Option "A" and "D" is the correct answer to the following question.

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