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Because you expect market interest rates to decline during the next four months, if you were...


Because you expect market interest rates to decline during the next four months, if you were offered two bonds with equal duration, you would select the one with the higher measure of convexity.
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Answer #1

The answer is True.

Because, when market interest rates decline, the yields tend to decrease which would mean an increase in the bond prices.

Convexity shows how the duration of a bond varies when the market interest rates vary. Though the current duration of the bonds are equal, the increase in the bond price would be greater for the bond whose duration changes more than the other.

Hence we would select the bond which has the higher measure of convexity, to benefit from the increase in bond prices.

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