"The value of outstanding bonds change whenever the going rate of interest changes. In general, short-term interest rates are more volatile than long-term interest rates. Therefore, short-term bond prices are more sensitive to interest rate changes than are long-term bond prices." Is this statement true or false?
This statement is true. The value of outstanding bonds is inversely related to changes in interest rates. When interest rates rise, the value of existing bonds decreases, and when rates fall, the value of existing bonds increases.
Short-term interest rates typically respond more quickly to changes in economic conditions, such as shifts in monetary policy or inflation expectations. This volatility in short-term rates leads to greater sensitivity in short-term bond prices.
On the other hand, long-term interest rates are influenced by a broader range of factors, including market expectations for future inflation, economic growth, and investor sentiment. These factors tend to have a more gradual impact on long-term rates, making long-term bond prices relatively less sensitive to interest rate changes compared to short-term bonds.
To summarize, the statement correctly states that short-term bond prices are more sensitive to interest rate changes than long-term bond prices due to the greater volatility of short-term interest rates.