Question

You expect both the general level of interest rates to rise in the near future (say...

You expect both the general level of interest rates to rise in the near future (say in about 6 months to a year). Which of the following two bonds will you buy?

Bond ZWQ with a duration of 5 or TUV with a duration of 15?

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Answer #1

Duration of a bond measures how much a bond's price will rise or fall when interest rate changes.

The longer the duration, greater is the sensitivity to interest rate rates

Duration is measured in years. Generally, the higher the duration of a bond i.e the longer you need to wait for the payment of coupons and principal ,the more its price will drop as interest rates rise.

So if you expect rates to rise, it makes sense to focus on shorter-duration bonds i.e  those that have less interest-rate risk. Also the reinvestment income would be more.

So Bond ZWQ with a duration of 5 should be bought

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