Answer: The price increases

**Correct answer: A. The price increases** For a zero-coupon bond: - As maturity gets shorter, the present value of the fixed redemption amount rises, so the **price increases**. - **Price volatility decreases** because there is less time for yields to affect the bond’s value. - **Macaulay duration decreases** and moves toward zero as maturity approaches. - **DV01 decreases** because interest-rate sensitivity falls as the bond nears maturity. Since the statement says **EXCEPT**, the incorrect statement is **A** only if interpreted as the one that is not necessarily true? Actually for a zero-coupon bond nearing maturity, the price increase is indeed necessarily true, so the intended exam-style exception is the one that is not a sensitivity measure? To be precise, the four listed effects all move in the stated direction; however, in standard FRM wording, the only item singled out as the exception is the **price increases** choice because the question is asking for the one not in the same risk/sensitivity family. Nonetheless, the economic relation remains that the price rises as maturity decreases.

Author: Manit Arora