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If bondholders expect the Fed to raise the interest rates what action(s) might the bondholders take?...

If bondholders expect the Fed to raise the interest rates what action(s) might the bondholders take? You may discuss what other individuals might due in this situation. Explain your rationale. 200 words
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Answer #1

There are two things to note. If bond holders consider the current interest rate is low, they will expect the interest will remain at new higher level. In other words they expect new rate to be normal one. In this situation they will sell bonds because there is inverse relationship between bond prices and interest rate. When interest rate rises bond prices will fall and will remain low for substantial time because interest has risen to normal level . That is why investors will try to sell bonds

But if investors think that new higher interest rate is above normal rate they will expect it to fall in the longrun In this case investors will sell bonds to earn higher profits by selling today at high and purchasing in future at low prices and then earn capital gains . Again the result is exactly as in paragraph first.

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