BOND PORTFOLIOMANAGEMENT – THEACTIVE & PASSIVESTRATEGY
INTEREST RATE RISK
Bond price & yields are inter related.As interest rate fluctuate bondholdersexperience capital losses and gains.Why?The reason is that in a competitivemarket securities are priced to offer fair expected rates of return.
E.g. If a bond is issued with a 10%coupon when the competitive yield is10%, then it will sell at par. If the marketrate rises to 11% the bond price mustfall so that its yield rises to 11%;conversely if the market rate falls to 9%its price must rise.