Final answer:
The correct option is b. Interest rates are falling.
The optimal time for purchasing long-term fixed-interest rate bonds is when interest rates are falling, as this increases the value of the bonds if the rates decrease after purchase. Considering factors such as rate of return, risk, and liquidity is also vital when investing in bonds.
Step-by-step explanation:
The best time for an investor seeking returns to purchase long-term, fixed-interest rate bonds is when interest rates are falling. As an investor buys a bond, they lock in the rate of return that reflects the current interest rate environment. Rate of return on bonds includes compensation for delaying consumption, an adjustment for inflationary rise in the overall level of prices, and a risk premium that considers the borrower’s riskiness.
When interest rates are falling, new bonds are issued with lower yields, thus bonds purchased before the decline become more valuable as they have higher interest rates. This makes existing bonds with fixed rates more appealing to investors, potentially leading to capital gains if sold before maturity. It's also important to note that the risk with bonds is often considered low to moderate, depending on interest rate changes in the economy after issuance. Liquidity is classified as moderate as an investor might need to sell the bond to regain cash.