A fixed income manager wants to take advantage of a forecast decline in interest rates over the next several months. Which of the following combinations of maturity and coupon rate would most likely result in the largest increase in portfolio value? Maturity Coupon rate a 2015 10% b 2015 12% c 2030 10% d 2030 12%
A or C, and I choose A as the question says the investment horizon is months, and a higher coupon would lead to higher reinvestment risk.
Decease in interest rate would increase Bond value. I’d say it’s C because longer maturity and lower coupon rate means high Duration.
yes, answer was C.
i still dont get it why longer maturity is imp here…please explain
longer maturity -> more sensitive to interest rate changes. -> will provide more capital gains when rates drop
aha i was thinking that the portfolio manager would want to avoid reinvestment risk.
Reinvestment risk is a pretty low rent kind of risk. Duration is a pretty high rent kind of risk. They really just aren’t close.