If interest rates rise, a bond with higher duration will experience what?

• A. Larger price drop
• B. Smaller price drop
• C. Price increase
• D. No change

Answer: (A)

Duration tells you how much a bond’s price will move in response to changes in interest rates. When rates rise, prices fall, and the larger the duration, the bigger that fall. The approximate rule is that the percentage price change is about minus the duration times the change in yield. So, for the same rate increase, a bond with higher duration experiences a larger price drop. The other options don’t fit because a rise in rates doesn’t push prices up, and a higher-duration bond isn’t less affected or unchanged—it's more sensitive, not less.