Pete Prophet, the manager of a bond mutual fund, is expecting interest rates to increase. All else equal, which of the following bonds would be the best investment under this assumption?

Question

Quizplus · Accepted Answer

If Pete is expecting interest rates to increase, the bond with a 10% coupon and 5 years to maturity is the best investment. If interest rates increase, bond prices fall, so he will want to invest in the bond that will have the lowest percentage decrease in price. This will be the bond with the shortest duration, which is the bond described in Choice B. It has the highest coupon and the fewest years to maturity.

Pete Prophet, the Manager of a Bond Mutual Fund, Is