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What would be the impact of higher expected future interest rates on today's price of bonds...

What would be the impact of higher expected future interest rates on today's price of bonds and interest rate? Use the portfolio choice theory to answer this question.

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Answer #1

According to the portfolio choice theory the investor is interested only with expected values of securities and expected returns on portfolio.To maximise the return from portfolio one need to invest in only one security which will provide higher rate of returns
There is an inverse relationship between the interest rates and bond prices .The existing or todays bond prices moves in opposite direction of change in market interest rate.As there would be an increase in the interest rates in future the present bond price will decrease .According to the portfolio choice theory the investor will invest only in those bonds which will yield the investor higher rate of returns. Thus if the future interest rates are expected to increase the bond price will decrease and thus investor will not invest in bonds .

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