Question: How does an increase in interest rates affect a securitys duration? You have five years until you need to take your money out of your

How does an increase in interest rates affect a securitys duration?

You have five years until you need to take your money out of your investments to make a planned expenditure. Right now bonds are promising an 8 percent return. You buy a five-year duration bond. After you buy the bond, interest rates fall to 6 percent and stay there for the full five years. You reinvest the coupons and earn 6 percent. Will your realized return be more or less than the originally promised 8 percent? Explain.

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer
Step: 1 Unlock blur-text-image
Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock
Step: 3 Unlock

Students Have Also Explored These Related Accounting Questions!