Multiple choice

If yield is expected to fall, a debt fund manager will do all of the following except

  1. sell short maturity securities and buy long maturity securities

  2. see that the fund's average duration becomes longer than the market's average duration

  3. sell long duration securities and buy short duration securities

  4. sell high coupon securities and buy low coupon securities
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

When yields are expected to fall, bond prices will rise. A fund manager would increase duration (buy long-term, sell short-term) to maximize price appreciation. Option C describes decreasing duration - the opposite strategy - which is what they would NOT do when expecting falling yields.

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