Protecting future tuition against market volatility.
The Johnsons are concerned about the impact of rising interest rates on their $250,000 bond portfolio, which is earmarked for their children's college education. With college costs projected to increase significantly, they need to ensure their bond investments remain stable and provide the expected returns, despite potential market volatility. They worry about losing principal if rates rise sharply and aren't sure how to quantify this risk.
Using Golden Door Asset's Bond Convexity Calculator, the Johnsons' advisor was able to quantify the portfolio's sensitivity to interest rate changes. The calculator revealed a convexity of 2.5, indicating the portfolio would outperform a duration-matched portfolio if interest rates increased by more than expected. This allowed the advisor to adjust the bond holdings, reducing exposure to longer-term bonds and increasing investments in shorter-term, higher-quality bonds to mitigate potential losses while preserving yield.
The Bond Convexity Calculator uses the bond's price, yield, coupon rate, and time to maturity to determine convexity. Companion calculators such as Tax Equivalent Yield Calculator and Credit Spread Calculator helped assess the after-tax returns and credit risks of alternative bond investments.
$15,000 potential loss mitigation by identifying high convexity exposure in the bond portfolio.
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