John Smith and Jane Brody are assistant portfolio managers. The senior portfolio manager has asked them to
Question:
John Smith and Jane Brody are assistant portfolio managers. The senior portfolio manager has asked them to consider the acquisition of one of two option-free bond issues with the following characteristics:
Issue 1 has a lower coupon rate than Issue 2. Issue 1 has a shorter maturity than Issue 2. Both issues have the same credit rating Smith and Brody are discussing the interest rate risk of the two issues. Smith argues that Issue 1 has greater interest rate risk than Issue 2 because of its lower coupon rate. Brody counters by arguing that Issue 2 has greater interest rate risk, because it has a longer maturity than Issue 1.
a. Which assistant portfolio manager is correct with respect to their selection of the issue with the greater interest rate risk?
b. Suppose that you are the senior portfolio manager. How would you suggest that Smith and Brody determine which issue has the greater interest rate risk?
CouponA coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest... Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...
Step by Step Answer:
a While both assistant portfolio managers are correct in that they have identified two feature...View the full answer
