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 fall, and when they decrease, bond prices rise. Since the bond's duration is less than the investment horizon, the realized rate of return is heavily influenced by the change in interest rates. Therefore, if interest rates increase, the bond's price will decrease more than what is already factored into the bond's yield, resulting in a larger realized rate of return.

You Have an Investment Horizon of 6 Years