You have an investment horizon of 6 years. You choose to hold a bond with a duration of 4 years. Your realized rate of return will be larger than the promised yield on the bond if ________.

Question

Quizplus · Accepted Answer

When interest rates increase, bond prices decrease. Since the bond's duration is 4 years, the bond's price will be more sensitive to changes in interest rates within that time frame. Therefore, if interest rates increase, the bond's price will decrease more than the decrease in the bond's promised yield, resulting in a larger realized rate of return.

You Have an Investment Horizon of 6 Years