Question

You manage a portfolio of bonds for the Kentucky Teacher Retirement System. Bonds range in quality from BB to AAA. Coupons range from zero to 8.25%. The average maturity of all bonds in the portfolio is 18.5 years. Because this portfolio supports a state pension system, the actuaries insist that you must maintain that average maturity of 18.5 years (i.e. you cannot increase or decrease the overall average maturity of the bonds in the portfolio). You have learned that economists have forecasted a sharp rise in the U.S. yield curve. The result would be a significant increase in both short-term and long-term interest rates in this country. Understanding the negative impact that increasing rates have on bond values, you are concerned. What are changes that you can make to the bond portfolio to minimize the effects of interest rate risk? Be specific and explain your rationale.

Answer 1

We all know that if the Interest rates are increasing of the bonds then the value or bond prices are increased but we have invested for long term so we get less interest but in the market there is a high interest So there is a negative effects of increasing rates in bond value So the changes that are required to made in the portfolio to minimise the effects of interest rate risks is that the person can redeem the bonds which are of long term and try to make investment more and more in the short term bonds so if in future the when the interest rates of the bonds are increased then redeem from the short term investment and invest in the long term bonds which help over the effects of chnage of risk of increasing interest rates