Question
Price risk, or interest rate risk relates to current market value of the bond portfolio, while reinvestment risk relates to the income the portfolio produces.
Price risk, or interest rate risk relates to current market value of the bond portfolio, while reinvestment risk relates to the income the portfolio produces. Which type of risk is more relevant depends on how long a given investor plans to hold the bonds his or her investment horizon.
Short investment horizon: Suppose you plan to go to graduate school in two years and you will need money for tuition. Which type of risk would you be most concerned with and why?
Long investment horizon: Suppose that a young couple is saving for their childrens education or imagine a retiree who lives on income from her bond portfolio. Which type of risk would they be more concerned about interest rate risk or reinvestment risk? Why?
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Principles of managerial finance
Authors: Lawrence J Gitman, Chad J Zutter
12th edition
9780321524133, 132479540, 321524136, 978-0132479547
