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Q11-2B

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Essentials Of Investments
Found in: Page 360
Essentials Of Investments

Essentials Of Investments

Book edition 9th
Author(s) Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus
Pages 748 pages
ISBN 9780078034695

Short Answer

You predict that interest rates are about to fall. Which bond will give you the highest capital gain?

a. Low coupon, long-maturity

b. High coupon, short maturity

c. High coupon, long maturity

d. Zero coupon, long maturity

a. Low coupon, long-maturity

See the step by step solution

Step by Step Solution

Definition of capital gain

The recorded increase in the asset value on its sale is referred to as capital gain.

Explanation of the highest capital gain.

Since bonds with long maturities and low coupons have the longest duration because of their sensitivity to change in the market, they will produce the largest price change due to any interest rate change. Therefore the correct option is ‘a’.

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