(9)You own a bond portfolio and expect the market interest rate to increase for
ID: 2770094 • Letter: #
Question
(9)You own a bond portfolio and expect the market interest rate to increase for the foreseeable future. (a) What should you do with regards to the Duration of the portfolio and your own investment horizon? (b) What are the two reasons for doing so?
(12)You own a bond portfolio and expect the market rate of interest to decrease for the foreseeable future. (a) What should you do with regards to the Duration of the portfolio and your own investment horizon? (b) What are the two reasons for doing so?
Explanation / Answer
Bond value is equal to the sum of present value of coupon payments and the present value of face amount of the bond.
Bond duration is generally expressed in terms of years. It measures the time taken by the bond to be repaid by its internal cash flows. Generally the bonds which are having higher durations can carry more risk (more price volatility). The bonds which are having short durations can carry very low risk (low price volatility).
The higher duration bonds with high risk will show the high impact on interest rates on bonds. Suppose if you have short duration of bond portfolio, then it will helps to manage the losses due to rising interest rates. Therefore, investing shorter duration of bonds are more benefit able to the investors. Short duration means less price risk and low volatility.
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