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Zorluk: ZorSystematic and Market Risks

An investor holds a long-term portfolio exclusively consisting of fixed-rate U.S. Treasury bonds maturing in 20 to 30 years. Over a two-year period, persistent macroeconomic inflation prompts the Federal Reserve to implement aggressive interest rate hikes. Although all principal and interest payments from the U.S. government remain fully guaranteed, the investor observes a 25% decline in the current secondary market value of the portfolio. Which of the following statements correctly identifies the primary risk affecting this portfolio and its fundamental characteristic?

  1. The portfolio experienced interest rate risk, a systematic risk that depresses existing bond prices as prevailing interest rates rise and cannot be eliminated through diversification.Cevap
  2. B
    The portfolio experienced credit risk, a non-systematic risk arising because unexpected inflation impairs the U.S. government's ability to fulfill sovereign debt obligations.
  3. C
    The portfolio experienced market risk, a non-systematic risk that could have been completely eliminated by reallocating the funds across 100 different long-term corporate bond issuers.
  4. D
    The portfolio experienced inflation risk, which causes existing fixed-income secondary market prices to increase to compensate bondholders for declining purchasing power.

Cevap

The portfolio experienced interest rate risk, a systematic risk that depresses existing bond prices as prevailing interest rates rise and cannot be eliminated through diversification.
The correct answer accurately identifies interest rate risk as a systematic risk factor. Rising prevailing interest rates diminish the secondary market value of existing fixed-rate bonds because investors demand yields competitive with newly issued debt. Because interest rate risk is systematic (macroeconomic), holding U.S. government backing or diversifying across issuers cannot remove this price sensitivity.

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1
Identify the nature of the securities in the scenario.
The portfolio contains long-term U.S. Treasury bonds, which carry zero default/credit risk due to sovereign backing.
Establishing that credit risk is not a factor narrows the cause of the price drop to macroeconomic/systematic factors.
2
Analyze the impact of Federal Reserve rate hikes on fixed-rate debt instruments.
Rising prevailing interest rates reduce the secondary market value of existing fixed-coupon debt securities because newly issued debt offers higher coupon yields.
Bond prices and market interest rates move inversely; longer-duration bonds experience greater price depreciation for a given change in rates.
3
Classify the risk type within the risk framework.
Interest rate risk is a primary form of systematic (market-wide) risk, affecting all fixed-income securities and unalleviated by diversification.
Systematic risks stem from broad economic shifts (such as monetary policy decisions) and cannot be diversified away by adding more fixed-income issuers.

Anahtar Kavram

Systematic Risk and Interest Rate Sensitivity
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Systematic and Market Risks

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