A corporate CFO and the fund manager for a bond fund are havinglunch, and after

Question

A corporate CFO and the fund manager for a bond fund are havinglunch, and after comparing notes about the US economy, it turns outthat both are convinced that bond market interest rates are goingto be dramatically higher in three months than they aretoday.   What should be their respectivepreferences for short-term vs. long-term bond maturities,recognizing that the CFO is participating in the bond market as aborrower, while the bond fund manager is aninvestor.

               A.           CFO: borrow short-term now / Fund manager: invest short-termnow

               B.           CFO: borrow: long-term now / Fund manager: invest short-termnow

               C.           CFO: borrow short-term now / Fund manager: invest long-term now

               D.           CFO: borrow long-term now / Fund manager: invest long-termnow

Explanation / Answer

As CFO is aborrower, he is reqd to pay Ont on bonds to investors. So if he isa short term borrower, he has to pay Int on bonds for a lesserperiod of time.. thus reducng his cash outflow.
Fund Manager isan investor & wants to reap the benefit of Higher Int rates.Thus he will currently invest for short term as he knows that theInt rates will go up in 3 months. Thus he will enter the mkt againafter 3 months.

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