The following excerpt comes from an article titled “Securities Counselors Eyes Cutting Duration” in the February 17, 1992, issue of BondWeek, p. 5:
“Securities Counselors of Iowa will shorten the 5.3 year duration on its $250 million fixed-income portfolio once it is convinced interest rates are moving up and the economy is improving . It will shorten by holding in cash equivalents the proceeds from the sale of an undetermined amount of 10-year Treasuries and adding a small amount of high-grade electric utility bonds that have short-maturities if their spreads widen out at least 100 basis points . The portfolio is currently allocated with 85% to Treasuries and 15% to agencies. It has not held corporate bonds since 1985, when it perceived as risky the onslaught of hostile corporate takeovers .”
Answer the below questions.
(a) Why would Securities Counselors want to shorten duration if it believes that interest rates will rise?
(b) How does the purchase of cash equivalents and short-maturity high-grade utilities accomplish the goal of shortening the duration?
(c) What risk is Securities Counselors indicating in the last sentence of the excerpt that it is seeking to avoid by not buying corporate bonds?