Question

Which of the following are correct?
I. If expected inflation increases, investors will consider selling bonds as the real value of this investment will decrease and bond yields should increase.
II. Reinvestment risk occurs when interest rates decrease so that coupons from a bond are reinvested at a lower rate than originally expected.
III. If interest rates are expected to increase, an investor should consider selling long-maturity bonds and buying short-maturity bonds to decrease portfolio duration.
IV. If the risk of default on a bond already issued by a company is expected to decrease, investors should consider selling that bond, as the discount rate will decrease.

The correct answer is:

Group of answer choices

I and II only

II and III only

III and IV only

All statements except IV

I and III only

Answer 1

All statements except IV.

I. If expected inflation increases, investors will consider selling bonds as the real value of this investment will decrease and bond yields should increase

II. Reinvestment risk occurs when interest rates decrease so that coupons from a bond are reinvested at a lower rate than originally expected

III. If interest rates are expected to increase, an investor should consider selling long-maturity bonds and buying short-maturity bonds to decrease portfolio duration.