Asked by Brooke Ramsey on Jun 27, 2024
Verified
Bond portfolio immunization techniques balance ________ and ________ risk.
A) price; reinvestment
B) price; liquidity
C) credit; reinvestment
D) credit; liquidity
Bond Portfolio Immunization
A strategy to minimize the impact of interest rate fluctuations on the market value of a bond portfolio by matching the portfolio's duration with the investor’s investment horizon.
Price Risk
The risk that the price of a financial asset will fluctuate, affecting the profit or loss of an investment.
Reinvestment Risk
The risk that future proceeds will have to be reinvested at a lower potential interest rate.
- Discern and apply assorted strategies of bond immunization and swaps in the administration of investment portfolios.
- Understand the impact of fluctuations in interest rates on the equilibrium between reinvestment rate risk and price risk.
Verified Answer
SS
SHaARDUL SHARMAJun 30, 2024
Final Answer :
A
Explanation :
Bond portfolio immunization involves balancing price risk (the risk of interest rate changes affecting the value of the bonds) and reinvestment risk (the risk of not being able to reinvest coupon payments at the same rate as the original investment). Choice B focuses on liquidity risk rather than reinvestment risk, while choices C and D involve credit risk rather than price or reinvestment risk.
Learning Objectives
- Discern and apply assorted strategies of bond immunization and swaps in the administration of investment portfolios.
- Understand the impact of fluctuations in interest rates on the equilibrium between reinvestment rate risk and price risk.