“In an environment of decreasing interest rates, the bond with the highest duration will have the greatest positive return”. consequently under scenario 2 , increasing interest rates, the bond with the lowest duration will outperform, so Bond 1 will outperform Bond 3. Why is B wrong ?
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In option B they have written Under Scenario 2 Rates increases Bond 1 underperform Bond 3. It will outperform as you said.