SIE Exam Question 432: Answer and Explanation

Question: 432

Which of the following bonds will rise the furthest in price when interest rates fall?

• A. 30 year 10% mortgage bond
• B. 10 year 4% Treasury bond
• C. 14 year 6% debenture
• D. 8 year 5% revenue bond

Correct Answer: A

Explanation:

A: Bonds with long maturities and low coupons have the most price volatility. Although some of the coupons are similar, maturity is the most significant factor for determining price volatility. Of the choices given, the 30 year mortgage bond has the longest time until maturity and exhibits the greatest price fluctuations when market dynamics change.