A fixed-income portfolio manager expects open-market benchmark interest rates to increase significantly over the next two years. To minimize capital depreciation caused by interest rate risk while maintaining exposure to debt securities, which adjustment to the portfolio's bond structure is most appropriate?
- Shift allocation toward short-term debt securities with serial maturities, as shorter durations experience less price decline when market yields rise.Cevap
- BIncrease allocation to long-term discount bonds, because bond market prices increase proportionally when interest rates rise.
- CReallocate heavily into long-term zero-coupon bonds, operating on the assumption that an inverted yield curve guarantees price expansion during rate hikes.
- DReplace taxable corporate issues with long-term out-of-state municipal bonds to eliminate market risk through federal and state tax exemptions.
Cevap
Shifting allocation toward short-term debt securities with serial maturities, as shorter durations experience less price decline when market yields rise.
Bond prices share an inverse relationship with market interest rates. When benchmark rates rise, existing bond prices fall. Debt securities with shorter maturities (and lower duration) experience significantly smaller price declines than long-term bonds. Additionally, serial maturity structures provide regular cash returns at maturity that can be reinvested into newly issued bonds paying higher rates.
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Anahtar Kavram
Inverse Relationship Between Bond Prices and Interest Rates / Duration Risk