Question

In a rising interest rate environment, how would bond values change over time? As a bond investor, what measures would you take to manage rate risk?

Answer 1

There is an Inverse relationship between bond value and Interest rates. When the Interest rate increases, the bond value decreases and vice-versa.

In a rising Interest rate environment , the bond value will decrease due to the inverse relationship between the bond value and interest rates.

In order to manage interest rate risk, we should purchase puttable bonds (the bonds which can be sold back to the company at a predetermined price (incase the interest rate start declining).

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