Question

You work for an asset manager specializing in bonds. You are expecting that the yield-to-maturity of Greek sovereign bonds will decline from 7.12% to 5.20% over the next two months. At the same time, you expect the yield-to-maturity of German sovereign bonds (with similar maturity, coupon rate and face value) to increase from 0.25% to 1.35%.

Which bond should you buy?
Which bond should you avoid?

Answer 1

An increase in yield of bonds lead to reduction in price of the bond and a reduction in yield implies an increase in bond prices.

So for Greek bonds wherein the yields decrease, this implies an increase in price. While for German bonds, the yields increase implies a decrease in price.

So we should buy Greek bonds now to gain capital appreciation because of increase in bond prices.

Similarly for the same reasons,we should avoid German bonds