b. What do you notice about the price of the bond in relationship to the maturity of the bond? (Select t best response.) A. As the time to maturity increases, the price of the bond increases first and then decreases. B. As the time to maturity increases, the price of the bond increases. C. As the time to maturity increases, the price of the bond decreases. D. As the time to maturity increases, the price of the bond decreases first and then increases.

The correct answer is: **C. As the time to maturity increases, the price of the bond decreases.** ### Explanation: The price of a bond is inversely related to its time to maturity, assuming all other factors (like interest rates and credit quality) remain constant. Here's why: 1. **Interest Rate Risk:** Longer-term bonds are more sensitive to interest rate changes. If interest rates rise, the present value of a bond's future cash flows (both coupon payments and the principal repayment) decreases more for longer maturities than for shorter ones. This leads to a lower price for longer-term bonds. 2. **Time Value of Money:** The longer the time to maturity, the more future payments are discounted back to their present value. Higher discounting results in a lower bond price. 3. **Inflation Risk:** Over longer periods, there is a greater risk that inflation will erode the purchasing power of the bond's future payments, making longer-term bonds less attractive and thus lowering their prices. Therefore, as the time to maturity increases, the bond's price generally decreases. **Answer:** C. As the time to maturity increases, the price of the bond decreases.