Question

You have an investment horizon of 6 years. You choose to hold a bond with a duration of 6 years and continue to match your investment horizon and duration throughout your holding period. Your realized rate of return will be the same as the promised yield on the bond if: I. Interest rates increase. II. Interest rates stay the same. III. Interest rates fall.

Answer 1

Answer: I. Interest rates increase.

II. Interest rates stay the same.

III. Interest rates fall.

Explanation:

Based on the information given in the question above, the realized rate of return will be the same as the promised yield on the bond when there's an increase in the interest rates.

Also, in a situation whereby the interest rates stay the same or falls, the realized rate of return will still be the same as the promised yield on the bond.