You expect interest rates to decline in the near future even though the bond market is not indicating any sign of this change.Which one of the following bonds should you purchase now to maximize your gains if the rate decline does occur?

Question

Quizplus · Accepted Answer

Zero coupon bonds have the longest duration and are most sensitive to changes in interest rates. If interest rates decline, the value of these bonds will increase the most compared to other types of bonds. As the bond market is not indicating any sign of a rate decline, it is best to choose a long-term bond to maximize gains in case the rate decline occurs in the future. Additionally, a zero coupon bond does not have interest payments, so it will not be affected by changes in interest rates in the same way as bonds with coupon payments.

You Expect Interest Rates to Decline in the near Future