If an investor has a 6 year investment horizon and chooses a bond with a 10...

If an investor has a 6 year investment horizon and chooses a bond with a 10 year duration then if interest rates increase then

A) the bond's sale price increase will be more than the lost reinvestment income.

B) the bond's sale price drop will be more than the extra reinvestment income.

C) the bond's sale price drop will be less than the extra reinvestment income.

D) the bond's sale price increase will be less than the lost reinvestment income.

Solutions

Expert Solution

Answer (C) the bond's sale price drop will be less than the extra reinvestment income.

Bonds have inverse relationship with intresest rate, if interest rate increases bond price will fall and if interest rate decreases bond price will increase. As buyer can easily prchase bond's for the interst rate increase so one need to sell bond's at a discount value.

jeff jeffy answered 2 years ago

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