Paper details:
please Review the paragraph Degazon and Borst stand on the issue and provide additional support for their explanations or supported reasoning for your disagreement. each respond should have maximum of 130 words. use only one Website source for each respond.
Degazon
Both price risk and reinvestment risk are types of interest rates that represent the ambiguity related to the outcome of changes in market interest rates. Such interest rates must be considered when making investments, corporate financial planning, and banking. Specifically, price risk is the uncertainty related to possible changes in the charge of an asset. Such uncertainty is caused by alterations in interest rate levels in the financial system. Boundless (n.d.) detailed, “The price risk is sometimes referred to as maturity risk since the greater the maturity of an investment (the greater the duration), the greater the change in price for a given change in interest rates” (para 2). Reinvestment risk is the possibility that certain investments may be terminated or stopped, forcing one to have to find elsewhere to invest. Reinvestment risk typically occurs if bonds are paid back earlier than usual.
As Brigham and Houston (2015) explained, price risk is higher on longer bonds rather than short-term bonds as reinvestment risk is higher on short-term bonds than long-term. Holders of long-term bonds risk the value of their portfolio decreasing while holders of long-term bonds risk a decline in income from their portfolio.
Duration can help holders counteract effects correlated to both risks. Duration is considered the average of how long it takes to obtain cash flows (Brigham & Houston, 2015). Personally, I think that the security helps protect the payoff but holders must still consider the risks as they may still occur. Holders should also consider various portfolios to ensure they are making the best decision.
Borst
when you are talking about the economy and money there is always some level of risk that goes along with both. This is because there are factors of every market that are not always certain and tend to change, sometimes without warning. One example of this is price risk which is also called interest rate risk, “the risk of a decline in a bond’s price due to an increase in interest rates” (Brigham & Houston, pg. 237, 2015). The other type of risk that goes along with bond’s and their potential is reinvestment risk, “the risk that a decline in interest rates will lead to a decline in income from a bond portfolio” (Brigham & Houston, pg. 238, 2015). The biggest difference between these two types of risk is that long-term bonds are more susceptible to price risk, because the longer the bond’s maturity, the longer it takes for that bond to be paid off and another one can be purchased. Risk reinvestment exposes short-term bonds more because of the shorter maturity that they have. There are ways for individuals to protect themselves from the risks of investing. The first way is diversifying maturities, which essentially is spreading out a person’s income amongst short-term and long-term bonds. The second, way to minimize risk is to buy a fixed or floating swap, which allows the investor to swap their current debt for another with a variable interest rate and in return they will receive the difference. The last way is bond laddering, “an investment portfolio in which investment amount is staggered among bonds with different maturities, in order to receive regular income and to hedge or smooth out the effect of interest rate fluctuations” (bussinessdictionary.com, n.d.). None of these completely protect an individual, and give them the entire payoff that they were hoping for, but it helps to minimize the risk and ensures that they still get a portion of their investments.
