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1) A fixed income portfolio manager who is most concerned about reinvestment risk would prefer to invest in: Amortizing bonds since periodic cash flows include principal repayments as well as coupon repayments
1) A fixed income portfolio manager who is most concerned about reinvestment risk would prefer to invest in:
- Amortizing bonds since periodic cash flows include principal repayments as well as coupon repayments.
- Non-amortizing bonds since periodic cash flows do not include principal repayments
- Premium bonds since the yield is higher.
- Discount bonds since the yield is lower.
- None of the above
Expert Solution
Question
A fixed income portfolio manager who is most concerned about reinvestment risk would prefer to invest in:
Answer :
b. Non-amortizing bonds since periodic cash flows do not include principal repayments
Reinvestment risk refers to the possibility that an investor will be unable to reinvest cash flows at a rate comparable to their current rate of return. If Investor invests in non amortized bond he will keep recieving same coupon payments which would not be the case in amortized bonds portion of interest out of total periodic payment would be reducing and there is higher reinvestment risk as cash flows includes principal repayments
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