Question: Question 2 (a) Explain why bond prices fluctuate in response to interest rate changes by the central bank (e.g. the Bank of England or the

Question 2 (a) Explain why bond prices fluctuate in response to interest rate changes by the central bank (e.g. the Bank of England or the Federal Reserve). (4 marks, maximum 200 words) (b) Why are short-term bonds less sensitive (e.g. their price fluctuates less dramatically) to changes in interest rates than long-term bonds? (3 marks, maximum 175 words) (c) What is meant by "default risk" in bonds, and how do investors respond to it? (3 marks, maximum 175 words) Total for the question 10 marks

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