Portfolio managers who anticipate an increase in interest rates should
A) Act to keep the duration constant.
B) Decrease the portfolio duration.
C) Increase the portfolio duration.
D) Assume higher risk in the market.
E) Invest in junk bonds.

Question

Quizplus · Accepted Answer

When interest rates increase, bond prices tend to decrease. Portfolio managers should thus decrease the portfolio duration to reduce exposure to this risk. A decrease in the portfolio duration would mean reducing the average time each bond held in the portfolio has until its maturity or until its cash flows are received. By doing so, the portfolio’s sensitivity to changes in interest rates is also decreased.

Portfolio Managers Who Anticipate an Increase in Interest Rates Should