Suppose everyone expects investment to rise sharply in three months.
How would this expectation be likely to affect bond prices?
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When interest rates rise, bond prices fall (and vice-versa), with long-maturity bonds most sensitive to rate changes.
This is because longer-term bonds have a greater duration than short-term bonds that are closer to maturity and have fewer coupon payments remaining.
Long-term bonds are also exposed to a greater probability that interest rates will change over its remaining duration.
Investors can hedge interest rate risk through diversification or the use of interest rate derivatives.
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