Bond Risk Management

Part 1: Respond to the discussion below:

• Given the Federal Reserve Board’s current and forward-looking position on interest rates, predict the level of risk associated with investing in bonds and recommend a portfolio percentage for investment in bonds for a financial institution. Provide support for your recommendation.  
• Assess how an increase in the interest rate would change your recommendation provided above. Indicate the basis for your rationale. 
• Please provide one citation/reference for your initial posting that is not your textbook.  Please do not use Investopedia or Wikipedia.

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Part 2: Respond to classmate’s response below:
“Being that the Federal Reserve recently went through with the initiative of lowering interest rates to improve our economy, this extended action has caused an increased risk of interest rate increases in bonds and other assets. Although bonds are often seen as a super safe investment, the changes made by the Federal Reserve may change the way investors look at these investments moving forward being that bonds are sensitive to declining interest rates. I predict the associated risk of bonds will severely increase which may not make the investment in bonds as appealing to investors. I would recommend scaling back on bond investments to the rate of making a 20% max contribution to bond investment if the party sees fit. This still leaves the vast majority of your portfolio designated to other investments that may counterbalance any deficits taken on with a negative return from bonds. In contrast, I believe that an increase in interest rates would bring bond risks down and make it a more attractive investment again. I say this because as I stated above, bonds seem to react both sensitively and negatively to declining interest rates so I can only imagine this change may increase chances of seeing a favorable return.”

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