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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Investing in Fixed Income Securities

Mrs. Iyer, aged 58, wants regular income and low volatility, and plans to hold a bond for 3 years. She is choosing between a 10-year government security and a 3-year AAA corporate bond. Which main risk does she avoid by choosing a bond whose maturity matches her horizon?

Matching the bond's maturity to her three-year horizon largely removes interest rate (price) risk at the horizon, because she receives face value at redemption rather than selling at an uncertain market price. Credit, inflation and liquidity risks are not eliminated by this matching.

  1. AReinvestment and price risk are largely offset, so interest rate risk on the horizon value is reducedCorrect
  2. BCredit risk is eliminated completely
  3. CInflation risk is eliminated completely
  4. DLiquidity risk is eliminated completely

Explanation

Matching maturity to the holding period means she gets face value at the end of the horizon, so she is not exposed to selling at a market price shaped by changing yields. Credit, inflation and liquidity risks remain, as a AAA corporate bond still has some of each.

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