Tom Holland, chief investment officer Zavier Investment Advisors during his meeting with the analysts discusses the impact of weakening economic activity. The equity market values are predicted to decline in the coming year and the negative GDP growth rate of the previous quarters is not expected to improve. Holland wants the investors to consider adding more fixed- income securities to their portfolios and limiting their equity exposure.
Holland observes, “Because of low government yields we should consider investment- grade corporate bonds over government securities. According to the consensus forecast among economists, the central bank is expected to lower interest rates in their upcoming meeting.”
After the meeting, Zandya Coleman, a fixed-income analyst selects the following four fixed- rate investment- grade bonds issued by Bliss Paper Company for investment (Exhibit 1).
Exhibit 1: Bliss Paper Company’s Fixed-Rate Bonds
Callable at par without a lockout period
Putable at par one and two years from now
Convertible bond: currently out of money
_*_Note: All bonds have a remaining maturity of three years.
Coleman finds that demand for consumer credit is relatively strong, despite other poor macroeconomic indicators. As a result, she believes that volatility in interest rates will increase. Coleman also reads a report from Thomson Crew, a reliable financial and economic information provider, forecasting that the yield curve may invert in the coming months.
Assuming the interest rates forecast is proven accurate, the bond with the smallest price increase is most likely:
X, Y , Z or S ?