Question

1. If you believed interest rates were going to decrease, what type of bond would you select?  Circle the appropriate choice.  High or low coupon?  Short or long maturity?   Premium or discount?   High or low duration?

Answer 1

If interest rates are going to decrease, then the type of bonds would select

1. High coupon

2. Long Maturity

3. Discount bonds

4. High duration

If interest rates are assumed to fall, bond investors choose high coupon bonds because they receives higher coupon payments than the interest rate. Moreover, they invest in long term bonds because they receive for more number of years.

If the interest rates falls, the bond prices will increase. hence, it is good to buy discounted bonds so that you earn more capital gains.

If interest rates were to fall, the value of a bond with a higher duration would rise more than a bond with a lower duration.