If investors expect interest rates to increase, they will:

• A. Create longer duration
• B. Buy longer bonds
• C. Hold cash
• D. Ladder bond maturities

Answer: (D)

When investors expect higher rates, the goal is to manage price risk and keep opportunities to reinvest at better yields. Bond prices fall as rates rise, and the longer a bond’s time to maturity, the more its price moves. So locking in long maturities makes the portfolio more vulnerable to rate increases. A ladder strategy spreads maturities across different time frames, so some bonds mature relatively soon and can be reinvested at the higher prevailing rates, while other portions stay invested longer. This approach provides liquidity and gradually captures rising yields without exposing the entire portfolio to a big drop if rates jump.

That’s why laddering bond maturities is the best fit. Creating longer duration or buying longer bonds would increase sensitivity to rising rates. Holding cash is safe but doesn’t take advantage of higher yields through reinvestment opportunities the way a ladder does.