Question

Bond investors will experience capital gains when?

market interest rates are high and rising.
		market interest rates are high and falling.
		the required rate of return exceeds the risk-free rate of return.
		more bonds are called than issued over a given period of time.

Answer 1

Capital gain will be experienced when value of security is more than the amount invested. As we know bond price and interest rates have inverse relationship, so when interest rates falls bond price rises and vice versa. To earn capital gain bond price should be higher. So when interest rate will fall, bond price will increase results in capital gain.

So the correct answer is market interest rates are high and falling.

Bond investors will experience capital gains when market interest rates are high and falling.