Question

Market economists all predict a decrease in interest rates. An astute bond manager wishing to maximize her capital gain might employ which strategy?

	A.	Switch from low-duration to high-duration bonds.
	B.	Switch from high-duration to low-duration bonds
	C.	Switch from low-coupon to high-coupon bonds
	D.	Switch from high-grade to low-grade bonds

Answer 1

The correct answer is Option A

The Higher the duration of the bonds the bond will show higher fluctuatuion in the price as compared to the interest rate, So, If the interest rate decreases the bond price will go up and show higher senstivity to the interest rate which will help him to maximize the capital gains.

For example: The bond of duration of 10 year will show rise by 10% if there is 1% fall in the interest rate, therefore, the bond price will rise by that percentage and capital gain can be maximised.