About 6 months ago, Jinnie inherited a portfolio that included a number of bonds. Jinnie knows very
Question:
About 6 months ago, Jinnie inherited a portfolio that included a number of bonds. Jinnie knows very little about investing in general and practically nothing about bonds specifically. She put together the following chart for your review. All Jinnie knows for sure is that she now owns seven bonds, ranging in maturity from 3 to 20 years. The following chart includes each bond, its Standard & Poor’s rating, its maturity, and its current yield.
Bond | Standard & Poor’s Rating | Years to Maturity | Current Yield |
ABC Corp. | AAA | 10 | 4.75% |
XYX Industries | AA | 3 | 3.17% |
INTL Limited | A | 7 | 6.11% |
MED Corp. | BBB | 5 | 4.40% |
SPEC, Inc. | B | 2 | 6.67% |
LAM Corp. | CCC | 3 | 25.97% |
BAD, Inc. | CC | 4 | 10.19% |
If Jinnie asked for a recommendation on which bonds to sell and which to buy more of, what would you recommend? If she purchases more of one particular issue, even if it offers the best risk-adjusted return, to what other types of risks could Jinnie be exposed? (Hint: Review the types of risks found in Chapter 11.)