Question

The Oxford Fixed Income Fund invests heavily in bonds. If the fund manager thinks that interest rates are going to fall, what changes should she make in her investment portfolio? A. Increase investment in long-term bonds B. Increase investment in callable debt instruments C. Increase investment in puttable securities D. none of the above

Answer 1

Answer:

A. Increase investment in long-term bonds

Explanation:

According to the Expectations hypothesis which is based on the principle that long-term rate is determined purely by current and future expected short-term rates, such that he expected final value from the accumulation of progression of short-term bonds approximates the final value from investing in long-term bonds.

Hence, given that when the interest rates fall, the prices of the bonds on the market already will rise, then it can be concluded that If the fund manager thinks that interest rates are going to fall, she should Increase investment in long-term bonds