Question
You are an investment adviser for a client, who has $200,000 to invest for exactly 4.56 years. She states that the investment must be in
You are an investment adviser for a client, who has $200,000 to invest for exactly 4.56 years. She states that the investment must be in default-free, non-callable bonds. She will pay you a commission based on how close her realized yield is to 8.6%. After a quick survey, you believe that the following investment opportunities are available (all annual coupon and compounding): You want to form a portfolio from bonds A and B such that this portfolios duration is exactly 4.56 years; so that you can recommend the client to invest in this portfolio. Calculate the dollar amount that the client would need to invest in Bond A of this portfolio as per your advice. Round your answer to 2 decimal places. For example, if your answer is 25.689, please write down 25.69. Bond Coupon Maturity Promised YTM Current Price A 8.6% 4 8.6% 1000 B 8.6% 22 8.6% 1000
Continue from the last question. Suppose you could not find Bonds A and B in the market, but you found a new default-free bond - Bond C with YTM equal to the clients target YTM and maturity of 6 years. This bond also has a duration of exactly 4.56 years. Hence, you recommend your client to invest in this new bond instead.
However, you change your mind and persuade your client to liquidate it in 5 years rather than 4.56 years.
In this case, what type of risk your client is mostly exposed to?
Group of answer choices
Reinvestment risk.
Price risk.
Credit risk.
None of the listed risks.
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