Question

You manage a $500 million bond portfolio and are required to be fully invested, but can choose to shift funds between maturity pools. If you believe that interest rates are headed upward in the next few months, you would be inclined to shift money from ______________________ to _____________________.

Group of answer choices

preferred stocks; intermediate-term bonds

short-term bonds; long-term bonds

long-term bonds; current assets

long-term bonds; short-term bonds

Answer 1

long-term bonds; short-term bonds

Considering each of the four options,

1. intermediate term bonds mature between 2 to 10 years from now, so this decision will not make a difference.

2. if you switch from short term to long term bonds, you will lose out on the higher interest in the short term.

3. you cannot shift to current assets as you are required to be fully invested.

4. long term bonds to short term bonds makes the most sense as the short term bonds will be able to capture the interest rate increases better and lead to higher returns.