For portfolio managers attempting to immunize their bond portfolios, they would need to realize that if interest rates were to increase:
A) reinvestment rates increase and bond prices rise.
B) reinvestment rates increase whereas bond prices decline.
C) reinvestment rates decrease whereas bond prices increase.
D) reinvestment rates decrease whereas bond prices decline.

Question

Quizplus · Accepted Answer

When interest rates increase, reinvestment rates (the rates at which cash flows from the bond can be reinvested) also increase. However, the price of existing bonds falls because new bonds are issued at the higher current interest rates, making the lower-yielding existing bonds less attractive.

For Portfolio Managers Attempting to Immunize Their Bond Portfolios, They