Canadian Securities Course (CSC) Level 1 Practice Exam

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Describe the impact of different maturity lengths on bond prices.

  1. Shorter term bonds are more volatile in price

  2. Longer term bonds are more stable in price

  3. Longer term bonds are more volatile in price

  4. There is no impact of maturity on bond prices

The correct answer is: Longer term bonds are more volatile in price

Longer-term bonds are indeed more volatile in price due to their increased sensitivity to interest rate changes. When interest rates rise, the prices of existing bonds fall; this effect is more pronounced in longer-term bonds because they have a longer duration over which the fixed interest payments will be received. Essentially, the longer the time to maturity, the greater the uncertainty regarding future interest rates and the more the present value of those future cash flows is affected. This volatility results from the fact that changes in interest rates have a more significant impact on the price of longer-term obligations compared to shorter-term bonds, which have less time for such changes to take effect. Thus, the correct answer underscores how maturity length is directly correlated with price volatility in the bond market.

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