Question 1: The values of outstanding bonds change whenever the going rate of interest changes. In general, short term interest rates are more volatile than long term interest rate. Therefore, short term bond prices are more sensitive to interest rate changes than are long term bond prices. Is this statement true or false? Explain.
Question 2: The rate of return you would get if you bought a bond and held it to its maturity date is called the bond's yield to maturity. If interest rates in the economy rise after a bond has been issued, what will happen to the bond's price and to its YTM? Does the length of time to maturity affect the extent to which a given change in interest rates will affect the bond's price?
Question 3: If you buy a callable bond and interest rates decline, will the value of your bond rise by as much as it would have risen if the bond had not been callable? Explain.