The Fed has been raising interest rates recently, and you believe that it will continue to do so for at least the next year. You also believe that the Fed's actions will raise interest rates broadly in the market, not just rates on short-term instruments. You have some extra money that you plan to invest just for the next year. Accordingly, you are looking for a fixed-income investment that will perform well over that period given your expectations.

You are looking at two bonds, both of which were issued several years ago. The first bond was issued during a period when U.S. interest rates were nearly zero. This bond has 5 years left to maturity, pays a 0.5% (i.e., 50 basis points) coupon rate, and sells for $733.49. The other bond was issued long ago when interest rates were quite high. That bond has 6 years left until maturity, pays a 10% coupon rate, and sells for $1,285.99. Both bonds make annual interest payments and have a par value of $1,000.

Which bond do you invest in and why?

Answer rating: 100% (QA)

Given your expectation of rising interest rates you should consider investing in the first bond with ... View the full answer