I’m trying to understand what happens when Dur(A) and Dur(L) are not equivalent when immunizing a portfolio. (Schweser p 21). Schweser says when Dur(A)
When Dur(A)
How does reinvestment risk compare to price gains in terms of relative degree? (Not directional changes)
What about price risk? They’re not saying anything about it (presumably because they know that you already take it into account); they’re talking about reinvestment risk in addition to price risk.
[quote=“tribeca_regent”]
When Dur(A)
It is.
Because you’re reinvesting the coupons at a lower interest rate than you’d originally planned.
That depends on how long you have to reinvest the cash flows. In general, given a single interest rate change, the amount of time to recover the loss (or lose the gain) because of reinvestment is . . . are you ready for this? . . . the (modified) duration of the bond. So, for very short duration bonds, the reinvestment risk will be about equal to the price (i.e., interest-rate) risk; for long duration bonds, the reinvestment risk will be lower than the interest-rate risk.
This totally cleared it up for me. Thanks S2000
My pleasure.