Final answer:
As an income-oriented investor expecting interest rates to fall, you should opt for long-term, non-callable bonds, which will increase in value if the interest rates decline and are protected from being called before maturity.
Step-by-step explanation:
If you are an income-oriented investor who believes that interest rates are relatively high and will decline in the future, you should purchase long-term, non-callable bonds. When interest rates decline, the value of existing bonds with higher interest rates typically increases since they are paying more than the new bonds being issued at the lower current rates.
Non-callable bonds protect you because the issuer cannot repay the bonds before their maturity date, whuch prevents the issuer from reissuing new bonds at a lower rate and calling your higher rate bonds.
On the other hand, zero-coupon bonds do not pay periodic interest; instead, they are sold at a discount and pay their full face value at maturity. The choice between a zero-coupon or a coupon bond, long-term or short-term, depends on your investment goals and interest rate expectations.
If interest rates decrease, as you expect, long-term bonds will experience a greater increase in value, while short-term bonds would need to be reinvested sooner, possibly at the new, lower interest rates.
Freely callable bonds are not suitable in this scenario because if rates decline, the issuers are likely to call these bonds and reissue new ones at lower rates, leading to reinvestment risk for investors.