If you expected interest rates to fall,you would prefer to own bonds with
A) short maturities and low coupons.
B) long maturities and high coupons .
C) long maturities and low coupons.
D) short maturities and high coupons.
E) none of the above.

Question

Quizplus · Accepted Answer

When interest rates fall, bond prices rise. Long-term bonds are more sensitive to interest rate changes compared to short-term bonds. This means that long-term bonds experience larger price changes than short-term bonds when interest rates change. Low coupon bonds pay a lower interest rate to the bondholder, so their price depends more on changes in interest rates. Therefore, if interest rates fall, long-maturity bonds with low coupons will experience the largest price increase, making them the preferred choice for investors.

If You Expected Interest Rates to Fall,you Would Prefer to Own