An investor owns bond #1, which has a rate of return of 10 percent, but a similar bond #2 has an 11 percent return and equal risk. By selling bond #1 and buying bond #2 to earn a higher return, the
Investor is engaging in

Question

Quizplus · Accepted Answer

The investor is engaging in arbitrage, which is the practice of taking advantage of price differences between two or more markets. In this case, the investor is selling a lower-yielding bond and buying a higher-yielding bond with equal risk, in order to earn a higher return. This is a common strategy for bond investors seeking to maximize their returns.

An Investor Owns Bond #1, Which Has a Rate of Return