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Kentucky teacher retirement system

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You manage a portfolio of bonds for the Kentucky Teacher Retirement System. Bonds range in quality from BB to AAA. Coupons range from zero to 8.25%. The average maturity of all bonds in the portfolio is 18.5 years. Because this portfolio supports a state pension system, the actuaries insist that you must maintain that average maturity of 18.5 years (i.e. you cannot increase or decrease the overall average maturity of the bonds in the portfolio). You have learned that economists have forecasted a sharp rise in the U.S. yield curve. The result would be a significant increase in both short-term and long-term interest rates in this country. Understanding the negative impact that increasing rates have on bond values, you are concerned. What are changes that you can make to the bond portfolio to minimize the effects of interest rate risk? Be specific and explain your rationale.

Reference no: EM131109064

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