CFA Practice Question

There are 490 practice questions for this study session.

CFA Practice Question

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

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.

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.
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