3. Suppose today’s interest rate environment is very low (it is) and you believe that the...
3. Suppose today’s interest rate environment is very low (it is) and you believe that the only direction for interest rates to go is up. Which would be the best type of bond to invest in and why? a: a 20-year zero
b: a 10-year 8% coupon paying bond
c: a 90-day treasury note or bill
d: a floating rate bond which has a coupon of the BBSW rate + 1%
Homework Answers
Option d is correct because in case of rising interest rate scenario floating rate of BBSW+1% will continuously give you the highest interest rate among all the other bonds.
A 20 year zero coupon bond or 10 year-8% coupon paying bond have fixed interest rate and hence you will not get less interest income than a floating rate bond eventually. Also, the 90 day treasury bill will have less interest income because you once bought you can not get higher interest until 90 days. Hence, floating rate bond is better.
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