Title: Dr. Sharma Defends Her Portfolio: Mitigating Interest Rate Risk with Bonds Tagline: Dr. Anya Sharma's Bond Ladder: Reducing Interest Rate Risk by Calculating Effective Duration Problem: Dr. Anya Sharma, a 35-year-old physician, is diligently paying off her $280,000 student loan while also maxing out her retirement accounts. While focused on debt repayment and retirement savings, she's aware that a portion of her portfolio should be allocated to fixed income for stability. However, she's concerned about the potential impact of rising interest rates on her bond investments, particularly given her long investment horizon. She wants to ensure her fixed income allocation provides diversification without exposing her to excessive interest rate risk that could derail her financial goals. She has already diversified into global equities and real estate, and is unsure if bond ETFs are the right path. Solution: Dr. Sharma uses the Golden Door Asset Effective Duration Calculator to analyze several bond options with varying maturities and coupon rates. By calculating the effective duration of each bond, she is able to create a bond ladder with staggered maturities. This strategy involves purchasing bonds that mature at different points in time, such as 1 year, 3 years, 5 years, and 10 years. As each bond matures, she reinvests the principal into a new bond with a longer maturity, effectively maintaining a diversified portfolio with a consistent yield. The calculator showed a 10-year Treasury bond with effective duration of 9, meaning for every 1% increase in interest rates, the price of the bond is expected to fall by 9%. Seeing this risk, she chose a diversified portfolio of shorter-duration bonds and CDs instead. ROI: By strategically managing her portfolio’s effective duration, Dr. Sharma reduces her exposure to interest rate risk. This strategy helps her avoid potential losses if interest rates rise, allowing her to stay on track with her financial goals, including student loan repayment and retirement savings. This approach is projected to save her approximately $15,000 in potential losses over the next 10 years compared to investing solely in long-term bonds, and increase her overall return by 0.5% annually due to more active management of bond yields. Description: See how Dr. Sharma used our Effective Duration Calculator to strategically build a bond ladder, mitigating potential losses from rising interest rates and optimizing her fixed income portfolio. Learn how to protect your investments and achieve financial security. Category: Client Service