Question

Course textbook, 12th edition 1. [Chapter 4) Use Table 2 to explain the following finding: (page 77) "The more distant a bond maturity date, the lower the rate of return that occurs as a result of an increase in the interest rate."

Explain this finding

Answer 1

IF ANY QUERY, FEEL FREE TO ASK Solution Here as per Table 2 we can see that due to increase in interest rate, rate of return of Bond with maturity 30 years < 20 year < 10 years < 5 years < 2 years < 1 year. Hence, the finding " The more distant a bond 's maturity date, lower the rate of return that occur as a result of an increase in interest rate. Also we know that Change in price of bond depends on duration of bond. More the duration is more shall be change in the price of bond. Long maturity bond have more duration as compared to short maturity bond. Change in interest rate are inversely related to change in price of bond that is if interest rate decrease price of bond increase and vice-versa. Hence, on basis of this also we can justify finding.