Question
Longer-term bonds have
(smaller/greater) interest rate sensitivity because a
(smaller/larger) portion of a bond's value comes from the face amount.
(smaller/greater) interest rate sensitivity because a
(smaller/larger) portion of a bond's value comes from the face amount.
Answers
GPT-4o mini
Longer-term bonds have **greater** interest rate sensitivity because a **larger** portion of a bond's value comes from the face amount.
This is because the present value of the bond's future cash flows (which include interest payments and the return of the principal face amount) is more heavily influenced by changes in interest rates for bonds with longer maturities. When interest rates rise, the present value of the future cash flows decreases more significantly for longer-term bonds compared to shorter-term bonds, resulting in greater sensitivity to interest rate changes.
This is because the present value of the bond's future cash flows (which include interest payments and the return of the principal face amount) is more heavily influenced by changes in interest rates for bonds with longer maturities. When interest rates rise, the present value of the future cash flows decreases more significantly for longer-term bonds compared to shorter-term bonds, resulting in greater sensitivity to interest rate changes.