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An investor is an avid bond purchase. He requires a 5% return on his bond purchases,...

An investor is an avid bond purchase. He requires a 5% return on his bond purchases, yet, the bonds today currently yield 4% as a AA rated bond. How can he achieve a 5% return on his bond purchases in the future?

Please explain also how he can reduce changes in bond prices that are part of his portfolio

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Expert Solution

He can achieve a 5% return on Bond purchases in the future if he is trying to switch to other bonds which are paying with higher rate of interest and this will mainly be lower rated bonds.

Lower rated bonds will be generally showing the investor with the higher amount of yieild and it will be providing him the required rate of return with higher risk. It can also mean that the investor can keep his present portfolio and add more bonds which are lower grade bonds in order to improve its yield.

Changes in the bond prices that are part of the portfolio can be managed through managing of the interest rate risk along with credit risk by subscribing to the higher quality bonds and investor can also try to enter into interest rate swaps in order to manage with the the fluctuations of the variable interest rates and he can also so take various bonds which are having the puttable option so he can redeem them before the maturity.

jeff jeffy answered 2 years ago
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