Mini Case Ch5

Sam Strother and Shawna Tibbs are vice presidents of Mutual of Seattle Insurance Company and co-directors of the companys pension fund management division. An important new client, the North-Western Municipal Alliance, has requested that Mutual of Seattle present an investment seminar to the mayors of the represented cities, and Strother and Tibbs, who will make the actual presentation, have asked you to help them by answering the following questions.

n. What is reinvestment rate risk? Which has more reinvestment rate risk: a 1-year bond or a 10-year bond?

o. How are interest rate risk and reinvestment rate risk related to the maturity risk premium?

p. What is the term structure of interest rates? What is a yield curve?

q. Briefly describe bankruptcy law. If a firm were to default on its bonds, would the company be liquidated immediately? Would the bondholders be assured of receiving all of their promised payments?