If you expected interest rates to fall, you would prefer to own bonds with
A) long durations and high convexity.
B) long durations and low convexity
C) short durations and high convexity.
D) short durations and high convexity
E) None of these are correct.

Question

Quizplus · Accepted Answer

When interest rates fall, bond prices increase. Bonds with long durations are more sensitive to changes in interest rates, meaning their prices increase more when rates fall. High convexity in a bond also adds to its price appreciation when interest rates decline, as it indicates the bond's price will increase at an increasing rate as rates drop. Therefore, if you expect interest rates to fall, owning bonds with long durations and high convexity would be preferable because they would benefit the most from the rate decrease.

If You Expected Interest Rates to Fall, You Would Prefer