Problem:
You are a bond portfolio manager who expects interest rates to decline by 1% over the next year. You are required to mark your portfolio to market each quarter, and measured on your resulting performance. Which of the following two bonds would you prefer to hold? WHY have you made this choice? (no calculations, just words and concepts in your answer.)
15 year maturity, 6% coupon, currently priced to yield 7%
5 year maturity, 5% coupon, currently priced to yield 4%