An investor holds a 10-year bond with a 5% coupon rate. If market interest rates unexpectedly rise by 1%, how will this likely impact the bond's price and its duration?

Question: An investor holds a 10-year bond with a 5% coupon rate. If market interest rates unexpectedly rise by 1%, how will this likely impact the bond's price and its duration?

Answer options: ✅ Price will decrease, duration will decrease.

• Price will increase, duration will increase.
• Price will decrease, duration will increase.
• Price will increase, duration will decrease.

Correct answer: Price will decrease, duration will decrease.

Explanation: When market interest rates rise, bond prices fall due to the inverse relationship. A higher discount rate also reduces the present value of future cash flows, effectively shortening the weighted average time to receive them, thus decreasing duration.