Why do garbage class bonds often have a negative duration?
A)The value of the returns in this bond class increases when interest rates increase.
B)It gives the rights to collateralization.
C)Bond values fall with interest rate increases.
D)It gives rights to reinvestment income on the cash flows in the CMO trust.
E)Significant risk premium required by the uninsured depositors.

Question

Quizplus · Accepted Answer

Garbage class bonds, often referred to as high-yield or junk bonds, have a negative duration because their value tends to increase when interest rates rise. This is contrary to the typical bond behavior where values decrease as interest rates increase. The reason behind this anomaly is that higher interest rates often signal a stronger economy, which can improve the financial health of the issuers of high-yield bonds, thus reducing their default risk and increasing the value of these bonds.

Why Do Garbage Class Bonds Often Have a Negative Duration