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)

I and IV only

I and III only

II and III only

None of the given statements are true

I and IV only

I and III only

II and III only

None of the given statements are true

Explanation / Answer

As the coupon rate is constant, if the required rate increases, bond price will decrease and vice-versa.

Long-term bonds fluctuate more in value than short-term value, when interest rate changes. This is because of convexity of bond.

Hence, correct option is (A)

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