Question

A bond fund manager is seeking to increase portfolio returns by selling the short-term bond in his portfolio and using the proceeds to invest in long-term bonds. He argues that since the new bonds would have the same rating as the ones sold, such strategy would enable higher return without increase risk. Discuss the strategy.

Answer 1

He is wrong.

Step-by-step explanation:

In order to understand this, bonds are basically loans that private individual or funds give to companies, in order to help them with cash or pay debt, they are paid in certain specifications at a certain timeframe, the problem is that interest rate is fixed, so if the market interest rate goes up, the fund is losing money having invested in that company at a lower interest rate, that is why right now it sounds smart to get a longer-term bond, instead of a short term, but in reality that's cash that you will have frozen with that company and in the meantime interest rates probably would go up.