Corporate bonds offer a series of fixed payments consisting of interest payments

Question

Corporate bonds offer a series of fixed payments consisting of interest payments and face value at maturity. As so, managers of financial intermediaries like pension funds and insurance companies frequently utilize such instruments to achieve their financing objectives.

Questions for discussion:

-Assume the manager of a $100 million portfolio of corporate bonds predicts interest rates will rise in the near future. What adjustments should be made to the portfolio assuming the market has not already adjusted for this prediction?

-Will a long-term zero coupon bond have more or less interest rate risk than a comparable coupon paying bond?

Explanation / Answer

1)We should sell this bonds in the markets since the price and interets rates are inversely proportional the price of the bond will come down once the market gets adjsuted to this.
2)Zero coupon bonds have higher interest rate risk than coupon paying bonds since they do not pay any coupon and pay lumpsum at the end of the year where the interets rate might be higher or lower and wil be effected. If we receive regular coupon we can invest in in other ways

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