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

Question

Quizplus · Accepted Answer

When interest rates rise, bond prices typically fall. However, the degree to which prices fall depends on the bond's duration. Higher duration bonds (those with longer time to maturity) are more sensitive to interest rate changes and will experience greater price declines than lower duration bonds (those with shorter time to maturity). Therefore, an astute bond manager wishing to maximise her capital gain might switch from high duration to low duration bonds in anticipation of rising interest rates.

Market Economists All Predict a Rise in Interest Rates