Which of the following situations lead to short-term profit opportunities in the bond market? A) Yields of all maturities start to rise. B) The increasing use of deferred call privileges. C) Interest rates become more volatile. D) Inflation is expected to rise.



My thinking, though I feel I know very little: A) Nope, yields rise, price drops b)Nope, Call privileges are not a good thing C)The only one left D)Nope, inflation is the enemy to bonds, it eats away at the interest payments. So is C correct?

The Clear

Yes, C is the correct answer.

My logic: if issuers are increasingly using call privileges that should mean there are expectations for decrease in the interest rates A decrease in interest rates would bring an increase in the bond price As we are talking about deferred call privileges, that means the bondholder can be relatively safe his bond will not be called in short-term Increase in interest rate volatility can present possibilities for both gains and losses So, what is wrong with my logic?

Increase in interest rate volatility just means that prices are going to flucuate as well. Keep in mind that things don’t always have to go up to make money. You can profit from bond prices falling too.

bodymore is right with falling bond prices: If I go short a bond future then I will make some money, won’t I?

Yep. You can make an unlimited amount of money shorting bond futures, shorting bonds, buying bond puts, etc…

Where did that question come from? It doesn’t make any sense whatsoever, as what is important is if you are able to anticipate either of the four changes as you can make money from either upward or downward movements.

Right sean, i don’t like these unprofessional questions, neither.

A, C and D all allow you to make money. I have no idea what the question means by ’ increased use of deferred call privileges’. This is about the stupidest question I have seen in a long time - I strongly suggest you promptly ditch the provider of this question and stop wasting your time/brain cycles.