Question

The best time for an investor seeking returns to purchase long-term, fixed-interest-rate bonds is when:

A) long-term interest rates are high and beginning to decline.
B) short-term interest rates are high and beginning to decline.
C) short-term interest rates are low and beginning to rise.
D) long-term interest rates are low and beginning to rise.

Answer 1

The optimal time for buying long-term, fixed-interest-rate bonds for an investor seeking returns is when long-term interest rates are high but starting to go down, allowing the investor to benefit from higher rates and potential price appreciation.

Step-by-step explanation:

The best time for an investor seeking returns to purchase long-term, fixed-interest-rate bonds is when long-term interest rates are high and beginning to decline. This is because the price of existing bonds with higher interest rates will increase when current interest rates start to fall, leading to potential capital gains in addition to the interest income. It is important to understand the components of an interest rate which include: compensation for delaying consumption, an adjustment for an inflationary rise in the overall level of prices, and a risk premium that accounts for the borrower's riskiness. The risk of bonds is typically considered low to moderate, depending on how much the interest rates in the economy change after the bond is issued, as well as the borrower's risk factor.