What is reinvestment rate risk


Case Scenario: Sam Strother and Shawna Tibbs are vice-presidents of Mutual of Seattle Insurance Company and co-directors of the company's pension fund management division.

A new client, the Northwestern foundation, had requested that Mutual of Seattle to give suggestion on the six corporate bonds they are planning to add to their existing portfolio. These are:

- Henry J. Kaiser Family Foundation;

- Pattern Energy Group Inc.

- Duke Energy Progress, LLC

- Residential Mortgage Securities 26 PLC

- Navient Corporation (NasdaqGS:NAVI)

- United Rentals (North America), Inc.

The current portfolio of Northwestern foundation holds a large proportion in domestic equities, international equities and hedge funds. Sam Strother is concerned with the foundation having such a large percentage in risky and potentially illiquid equity investment. And suggested Northwestern foundation adds some high quality bonds to reduce their risk exposure.

The Northwestern has requested that Mutual of Seattle present an investment seminar, and Strother and Tibbs, who will make the actual presentation, have asked you to help them by answering the following questions -

Problem 1: What is the difference between government bonds and corporate bonds, explain the potential risk of investing in each type of bonds?

Problem 2: What is interest rate (or price) risk? Explain using the bonds provide, which bond has more interest rate risk, Why?

Problem 3: What is reinvestment rate risk? Which bond has more reinvestment rate risk?

Note: Total 700 words overall, need 200-300 words per question add references as well.

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