Which of the following statements about the relationship between interest rates

Question

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)

A.

I and IV only

B.

I and III only

C.

II and III only

D.

None of the given statements are true

Explanation / Answer

TRUE STATEMENTS ARE:

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)

I) There is an inverse relationship between bond prices and interest rates.

Thus answer is

A.

I and IV only

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