Ch. 7 Question Solutions - QUESTIONS ANSWERS TO CHAP 07 7-1 7-2 Yes the statement is true False Short-term bond prices are less sensitive than long-term

Ch. 7 Question Solutions - QUESTIONS ANSWERS TO CHAP 07 7-1...

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QUESTIONS & ANSWERS TO CHAP. 077-1Yes, the statement is true.7-2False. Short-term bond prices are less sensitive than long-term bond prices to interest rate changes because funds invested in short-term bonds can be reinvested at the new interest rate sooner than funds tied up in long-term bonds.7-3The price of the bond will fall and its YTM will rise if interest rates rise. If the bond still has a long term to maturity, its YTM will reflect long-term rates. Of course, the bond’s price will be less affected by a change in interest rates if it has been outstanding a long time and matures shortly. While this is true, it should be noted that the YTM will increase only for buyers who purchase the bond after the change in interest rates and not for buyers who purchased previous to the change. If the bond is purchased and held to maturity, the bondholder’s YTM will not change, regardless of what happens to interest rates.

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