If you expected interest rates to fall, you would prefer to own bonds with
A) short maturities and low coupons.
B) long maturities and high coupons.
C) long maturities and low coupons.
D) short maturities and high coupons.
E) None of these are correct.

Question

Quizplus · Accepted Answer

If interest rates are expected to fall, the value of existing bonds with higher coupon rates will increase, making them more expensive to buy. Therefore, investors would prefer to buy bonds with low coupon rates, that would be likely to increase in value as interest rates decrease. Additionally, long-term bonds carry more interest rate risk than short-term bonds, so investors would prefer to own bonds with longer maturities to capture the potential increase in bond values as interest rates decline.

If You Expected Interest Rates to Fall, You Would Prefer