Question
Suppose you own a 30-year bond issued by GE and a 2-year bond issued by PG with identical coupon rates and par values. Which bond will you decrease in value more as interest rates rise?
Multiple choice question.
Both bonds will lose an equal percentage of value.
Both bonds will gain value as interest rates rise.
The PG bond will lose more because it has a shorter maturity.
The GE bond will lose more because it has a longer maturity.
Multiple choice question.
Both bonds will lose an equal percentage of value.
Both bonds will gain value as interest rates rise.
The PG bond will lose more because it has a shorter maturity.
The GE bond will lose more because it has a longer maturity.
Answers
GPT-4o mini
The correct answer is:
**The GE bond will lose more because it has a longer maturity.**
Explanation: Bonds with longer maturities are more sensitive to interest rate changes. When interest rates rise, the present value of the cash flows from a long-term bond (like the 30-year GE bond) will decrease more than those of a short-term bond (like the 2-year PG bond). This is due to the longer duration of cash flows, which are subject to the increased discounting effect when interest rates increase.
**The GE bond will lose more because it has a longer maturity.**
Explanation: Bonds with longer maturities are more sensitive to interest rate changes. When interest rates rise, the present value of the cash flows from a long-term bond (like the 30-year GE bond) will decrease more than those of a short-term bond (like the 2-year PG bond). This is due to the longer duration of cash flows, which are subject to the increased discounting effect when interest rates increase.