The longer a bond's maturity, the more its value will change for a 1% change in interest rates.

• A. True; longer maturity increases price sensitivity.
• B. False; longer maturity reduces price sensitivity.
• C. False; price sensitivity is independent of maturity.
• D. True; but only for high credit risk bonds.

Answer: (A)

The main idea here is duration: a bond’s price is more sensitive to interest-rate changes the longer its time to maturity. For small changes in yield, the approximate price change is equal to the negative of the bond’s duration times the yield change. Since longer-maturity bonds have higher duration, a 1% change in interest rates causes a larger price swing for them than for shorter-maturity bonds. In other words, when rates rise, longer-maturity bonds fall more in price, and when rates fall, they rise more, all else equal. This relationship doesn’t depend on credit risk; even after accounting for credit quality, longer maturities mean greater price sensitivity to rate changes.