WHY WOULD LONGER TERM COUPONS WITH LOW COUPON RATES BE THE MOST - ProProfs Discuss
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Why would longer-term coupons with low coupon rates be the most appropriate combination to own when interest rates are falling?



Asked by Eliana, Last updated: Sep 29, 2021

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John Smith

John Smith

John Smith
John Smith

Answered Sep 08, 2016

As interest rates fall, bond prices rise. to take advantage of this price increase, you would want to own the most volatile combination of characteristics in a bond. we know that low coupon bonds are more volatile than high coupon bonds. we also know that long-term bonds are more volatile n price than short-term bonds. so the most volatile combination would be low coupon long-term bonds. the least volatile combination would be high coupon short-term bonds. as such, if interest rates are rising and bondprices are falling, to minimize your loss in dropping prices, you would want to select the least volatile combination high coupon short-term bonds.
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