You have an investment horizon of 6 years. You choose to hold a bond with a duration of 10 years. Your realized rate of return will be larger than the promised yield on the bond if ________.

Question

Quizplus · Accepted Answer

When interest rates fall, the price of existing bonds rises because new bonds are issued at the lower current interest rates, making the older, higher-yielding bonds more valuable. Therefore, if you hold a bond and interest rates decrease, the market value of your bond increases, potentially leading to a realized rate of return that is larger than the bond's original promised yield.

You Have an Investment Horizon of 6 Years