Suppose Interest Rates Have Been at Historically Low Levels the Past

question 149

Multiple Choice

Suppose interest rates have been at historically low levels the past two years.A reasonable strategy for bond investors during this time period would be to

• A) invest in long-term bonds to reduce interest rate risk.
• B) invest in short-term bonds to reduce interest rate risk.
• C) buy only junk bonds which have higher interest rates.
• D) invest in long-term bonds to lock in a bond position for when interest rates increase in the future.

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Definitions:

Consumer Price Index

An index measuring the change over time in the price level of consumer goods and services purchased by households.

Base Year

A reference point in time used for comparative purposes, particularly in the context of economic and financial indices.

Consumer Price Index

A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care, changing over time.

GDP Deflator

A measure of the level of prices of all new, domestically produced, final goods and services in an economy, indicating how much of the change in the gross domestic product can be attributed to changes in the price level.