Question

Bonds can serve multiple objectives of an investor. A bond can offer a fixed income for a certain period of time, through its coupon payments, or offer wealth creation with relatively low risk. Furthermore, as part of a portfolio that includes riskier assets, bonds can be used as hedging instruments, or form the basis for higher risk tolerance in the risky component of a portfolio. The degree to which any of these possible investor objectives are served depends on the types of bonds selected.

In this week’s Discussion you will consider the choices of bonds in the context of various investor objectives. You will also consider the options to replace bonds with other assets in a portfolio in order to ensure that investor objectives are served within the constraints of an evolving interest rate environment and the changing yields of bonds themselves.

To Prepare

• Review this week’s Learning Resources, as well as other resources you may access from the Internet.

Post by Day 3 a 3- to 6-paragraph analysis of the types of bonds investors should include in their portfolios, given their particular investment objectives. Please make sure to include responses to the following specific questions:

• #1 What is the current term-structure of interest rates?
• #2 What are the yields of the most important types of bonds available to investors currently?
• #3 What is the relationship between yields to maturity and time to maturity for the identified bond types?
• #4 If you observe the yields of bonds you hold in your portfolio change, would you change your investment objectives? Would you rather keep your investment objectives constant and seek to change the types of bonds in your portfolio or even replace bonds with other assets? What other possible assets could be the closest substitutes for bonds in serving your investment objectives?

Please address clearly each of the questions in 1–2 paragraphs. Make sure you use APA style for your response(s) and properly cite any resources you have used.