Market economists all predict a rise in interest rates. An astute bond manager wishing to maximize her capital gain might employ which strategy?

Question

Quizplus · Accepted Answer

When interest rates are expected to rise, bond prices tend to fall. This is because newer bonds with higher coupons offer better returns, reducing the demand for lower-coupon bonds. Therefore, an astute bond manager could switch from high-duration to low-duration bonds to minimize potential losses. Short-term bonds tend to be less sensitive to interest rate changes, so their prices tend to be more stable.

Market Economists All Predict a Rise in Interest Rates