Q:
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.
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) Low convexity and low coupons
b) Low convexity and high duration
c) High convexity and high coupons
d) High duration and high convexity
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.
MORE FAQS

How is convexity used in risk management?

What is the correlation between a coupon rate and the convexity of a given bond?

How do I use the principles of convexity to compare bonds?

How can I calculate convexity in Excel?

How can I calculate convexity in MATLAB?

What does the Macaulay duration indicate about a bond?

A 7year, 6% coupon callable bond is currently trading at 96.25. The ...

How does duration impact bond funds?

How can I use a bond's duration to predict its return?

Do longterm bonds have a greater interest rate risk than shortterm bonds?

How does a bond's coupon interest rate affect its price?

What are the key factors that will cause a bond to trade as a premium bond?

How does a bond's coupon rate affect its price?

How does the effective interest method treat the interest on a bond?

How do debit spreads impact the trading of options?

What is the difference between yield and return?

What is the difference between the rule of 70 and the rule of 72?

What determines the price of a bond in the open market?

What does a negative bond yield mean?

How liquid are money market accounts?
RELATED FAQS

How is convexity used in risk management?
Learn how convexity is used for risk management for bond portfolios, and understand the difference between duration and convexity ... 
What is the correlation between a coupon rate and the convexity of a given bond?
Read about the relationship between the coupon rate of a bond, its yield and its convexity, and why zerocoupon bonds tend ... 
How do I use the principles of convexity to compare bonds?
Read a brief overview of bond duration and bond convexity and why bondholders should take these into consideration when deciding ... 
How can I calculate convexity in Excel?
Learn how to approximate the effective convexity of a bond using Microsoft Excel using a modified and simpler version of ... 
How can I calculate convexity in MATLAB?
Learn about convexity of the bonds and how to calculate it in MATLAB with function "bndconvy" after specifying necessary ... 
What does the Macaulay duration indicate about a bond?
Learn how the Macaulay duration shows the relationship between interest rate changes and the price of bonds, and see how ...
RELATED TERMS

Convexity
A measure of the curvature in the relationship between bond prices ... 
Negative Convexity
When the shape of a bond's yield curve is concave. A bond's convexity ... 
Convexity Adjustment
The change required to be made to a forward interest rate or ... 
Immunization
A strategy that matches the durations of assets and liabilities ... 
Bond
A debt investment in which an investor loans money to an entity ... 
Effective Duration
A duration calculation for bonds with embedded options. Effective ...