You are a bond trader. You manage $100m invested in US government bonds. This money must always be invested in government bonds. You are not allowed to invest in equities or in cash. You currently have $50m invested in a bond with a ten-year maturity paying a 3% coupon, and another $50m invested in a bond with a two-year maturity paying a 10% coupon. You are considering – but have not yet invested in -- a third bond which has a ten-year maturity and a 7% coupon. All bonds have a $1,000 nominal value.

You think interest rates will rise significantly in the near future. Which of the following is the best trading strategy:

Question

You are a bond trader.  You manage $100m invested in US government bonds.  This money must always be invested in government bonds.  You are not allowed to invest in equities or in cash.  You currently have $50m invested in a bond with a ten-year maturity paying a 3% coupon, and another $50m invested in a bond with a two-year maturity paying a 10% coupon. You are considering – but have not yet invested in -- a third bond which has a ten-year maturity and a 7% coupon. All bonds have a $1,000 nominal value.  
 
 You think interest rates will rise significantly in the near future.  Which of the following is the best trading strategy:

Accepted Answer

Sell the long-term bonds you currently hold and buy more of the two-year bond with the 10% coupon

Answer

Do nothing, your current portfolio is best placed to profit

Answer

Sell all the bonds you currently hold and hold just cash

Answer

Sell all the bonds you currently hold and buy the ten-year bond with the 7% coupon

Answer

Sell the short-term bonds you currently hold and buy more of the ten-year bond with the 3% coupon

Crowdly

You are a bond trader. You manage $100m invested in US government bonds. This ...

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