CFA Practice Question

CFA Practice Question

If you expect a decline in interest rates, you know that bond prices will ______, so you want a bond portfolio with ______ price volatility.
A. increase; minimum
B. decline; minimum
C. increase; maximum
Explanation: Coupon and maturity are the major variables that influence a bond's interest rate sensitivity. If one expects a major decline in interest rates, one knows that that bond prices will increase; so one needs a bonds portfolio with maximum price sensitivity (to interest rates) in order to realize the maximum possible capital gain. Bond prices will increase because investors are willing to pay more in order to receive the fixed coupon rate.

User Contributed Comments 1

User Comment
soukhov price sensivity risk = volatility risk = interest rate risk = duration ?
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