Protecting wealth through convexity analysis.
Dr. Sharma, while financially savvy, felt overwhelmed by the complexities of bond investing. She held approximately $300,000 in bonds within her taxable investment accounts, primarily comprised of corporate and municipal bonds with varying maturities. Aware of potential interest rate hikes, she worried about the negative impact on her bond portfolio's value and sought a strategy to minimize risk without sacrificing reasonable returns.
Golden Door Asset employed the Bond Convexity Calculator to analyze Dr. Sharma's existing bond holdings. The analysis revealed that her portfolio had a negative convexity profile, making it particularly vulnerable to losses if interest rates rose sharply. To mitigate this risk, we recommended restructuring her portfolio by selling bonds with lower convexity and purchasing bonds with higher convexity, effectively hedging against potential interest rate increases. We then used the Tax Equivalent Yield calculator to ensure optimal after-tax returns on the new selections and the Credit Spread calculator to understand the risk premiums she was taking.
The Bond Convexity Calculator allowed for precise calculation of convexity for each bond holding in Dr. Sharma's portfolio. This data, combined with yield and maturity information, enabled us to identify and quantify the portfolio's overall interest rate risk. We also used the Credit Spread and Tax Equivalent Yield tools.
$18,000 estimated loss avoidance in the first year, based on a projected 1% interest rate increase and the revised portfolio's improved convexity profile.
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