question archive The yield curve is currently flat at 6% and a bond investor is concerned about the possibility of rising interest rates
The yield curve is currently flat at 6% and a bond investor is concerned about the possibility of rising interest rates
Subject:FinancePrice:2.86 Bought4
The yield curve is currently flat at 6% and a bond investor is concerned about the possibility of rising interest rates. Which bond is most likely to be considered a hedge against rising interest rates?
A)A 5-year, 6% coupon straight bond
B) A 5-year, 6% coupon bond putable at 100% of par
C) A 5-year, 6% coupon bond callable at 102% of par
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The correct option is "B"
When the interest rate will rise, the bond price will fall. Putable bonds will give investors the option to sell the bond at a predetermined price. so it will not be affected by the rise in the interest rate in the market. So if there is a possibility of the interest rate to rise, then an investor should buy a putable bond.
