Question

You are friends with the Governor of the Bank of Canada. He admits that the Bank...

You are friends with the Governor of the Bank of Canada. He admits that the Bank of Canada is going to lower interest rates. This will come as a complete surprise to the market. You want to profit from this knowledge. What is your best investment strategy?

A) Buy Short maturity bonds

B) Buy long maturity bonds

C) Short sell short maturity bonds

D) Short sell long maturity bonds

Please explain with detail. Thanks in advance.

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Homework Answers

Answer #1

Option A is correct

Buy Short maturity bonds

Explanation:

If interest rates are lowered, then the bond price will increase, as bond price is inversely proportional to interest rates,

So, before the news of lowering of interest rates are out, one can purchase short maturity bonds,as short maturity bonds have greater impact of change of interest rates, and after the interest rates are lowered, bond price will increase and then one can sell those bonds to generate profit.

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