You Expect Interest Rates to Decline in the near Future

question 115

Multiple Choice

You expect interest rates to decline in the near future even though the bond market is not indicating any sign of this change.Which one of the following bonds should you purchase now to maximize your gains if the rate decline does occur?

• A)short-term; low coupon
• B)short-term; high coupon
• C)long-term; zero coupon
• D)long-term; low coupon
• E)long-term; high coupon

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Definitions:

Limit Pricing

A strategy where a firm sets the price of its product low enough to deter new entrants into the market.

Game Theory

The study of how people behave in strategic situations in which individuals must take into account not only their own possible actions but also the possible reactions of others. Originally developed to analyze the best ways to play games like poker and chess.

Strategic Behavior

Self-interested economic actions that take into account the expected reactions of others.

Dominant Strategy

A strategy that always results in the highest payoff for a player, regardless of the opponents' actions.