- CFA Exams
- CFA Level I Exam
- Topic 6. Fixed Income
- Learning Module 44. Introduction to Fixed-Income Valuation
- Subject 2. Relationships between Bond Price and Bond Characteristics

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**CFA Practice Question**

Bond price sensitivity ______ at a(an) ______ rate as maturity increases.

B. increases; decreasing

C. decreases; decreasing

A. increases; increasing

B. increases; decreasing

C. decreases; decreasing

Correct Answer: B

Bond price sensitivity is the sensitivity of a change in bond prices to a change in interest rates. Bond price sensitivity is influenced by the duration of the bond; the longer the duration of a bond, the greater the price sensitivity. A less sophisticated but acceptable approach is to tie price sensitivity to the maturity of the bond rather than its duration.

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**User Contributed Comments**
10

User |
Comment |
---|---|

tanyak |
why does it increase at a decreasing rate?? |

Masterkang |
Obviously the increase of the maturity from 1 year to 2 years has a bigger impact then then increase from 29 to 30 years. |

omer123 |
tanyak at longer maturities the change in price due to interest rate volatility will be smaller due to positive convexity and large at smaller maturities. |

euniceyew |
can anyone explain further y it increase at a decreasing rate..i still dun get the explanation..thanks |

bhaynes |
euniceyew - just can think about it on a percetage basis. If you increase a maturity for 1yr to 2yr, you doubled it. Where if you increase 19yr to 20yr, it's only about a 5% increase. While both increase, the latter increases by a smaller amount comparatively speaking. |

harpalani |
Thanks bhaynes! That's convincing. |

johntan1979 |
Or you can make up an example: 8% coupon, 2 years, yield 9% PV = 98.21 8% coupon, 3 years, yield 9% PV = 97.42 Percentage change = -0.7995% 8% coupon, 10 years, yield 9% PV = 93.50 8% coupon, 11 years, yield 9% PV = 93.11 Percentage change = -0.4153% See the decreasing rate? |

assiduous |
I like bhaynes' explanation. This concept can also be observed just by watching how the yields react to monetary policy. |

Inaganti6 |
Bhaynes DORLING LOVELY |

khalifa92 |
long-term bonds price volatility is greater than short-term bonds. |