Uniform Combined State Law (Series 66) Practice Exam 2025 – Your All-In-One Guide to Exam Success!

The term used for switching between long-term and short-term bonds is market timing. This strategy involves making investment decisions based on predictions of future market movements in interest rates. Investors engage in market timing in an effort to maximize returns by adjusting their bond holdings according to their analysis of market conditions, such as shifts in economic indicators or changes in monetary policy.

For example, when interest rates are expected to rise, investors may choose to sell long-term bonds, which are more sensitive to interest rate changes, and move into short-term bonds to mitigate interest rate risk. Conversely, if a decrease in interest rates is anticipated, they might switch back to long-term bonds to take advantage of higher yields. This approach relies on the investor's ability to accurately forecast market trends, which can be challenging and inherently risky.

Understanding market timing is crucial for effective bond investment strategies, as it encompasses the decision-making process related to changes in the duration and sensitivity of bond portfolios in response to market fluctuations.