You expect interest rates to decline in the near future even though the bond market is not indicating any sign of this change. Which one of the following bonds should you purchase now to maximize your gains if the rate decline does occur?

Question

Quizplus · Accepted Answer

Zero coupon bonds are the most sensitive to changes in interest rates, meaning they offer the highest potential for gains (or losses) when rates change. Long-term bonds also have more sensitivity to rate changes than short-term bonds. Therefore, the best choice to maximize gains if rates decline is to purchase a long-term zero coupon bond, as indicated in option C.

You Expect Interest Rates to Decline in the near Future