Q:
You currently are holding a portfolio of bonds. Interest rates are expected to increase over the next few months. In order to protect your investment, your bond portfolio should contain bonds with the following characteristics:
a) Low convexity and low coupons
b) Low convexity and high duration
c) High convexity and high coupons
d) High duration and high convexity
A:

The correct answer is c.
Bonds with high convexity are less affected by changes in interest rates than bonds with lower convexity. Bonds with higher convexity will always have a higher price than a bond with lower convexity, regardless if interest rates increase or decrease.
Bonds with high coupons have lower durations are the least affected by changes in interest rates.
For more on duration and convexity, refer to the Advanced Bond Tutorial.

RELATED FAQS

  1. A person whose registration has been revoked by an Administrator due to a felony ...

    The correct answer is a. The Administrator may suspend, deny or revoke registration in any capacity if the person has such ...
  2. Which of the following, under the NASD Conduct Rules, would constitute a complaint ...

    The correct answer is b. The NASD defines a “complaint” as adverse communications that are in writing. Choices I and III ...
  3. An investor has bought 25 call options on oil. The exercise price of the call is ...

    The correct answer is: a) Rule for a long call position: If at expiry, the asset price settles below the expiry price, Do ...
  4. Under the Investment Company Act of 1940, which of the following is not a formal ...

    The correct answer is d. A mutual fund is technically registered under the ’40 Act as an open-end management investment company. ...
RELATED TERMS
  1. No results found.
Hot Definitions
  1. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  2. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  3. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  4. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  5. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
Trading Center