Essay on Grace Decides to Immunize Her Portfolio

Grace’s portfolio is quite reliable and the forecast of the return on investment is quite optimistic since in fifteen years, Grace may more than double her capital from current $200,0000 to $451,020 in fifteen years. However, to achieve this goal, Grace should wait patiently and count on the stability of the financial market and the lack of rapid downturns, while unexpected growth is likely to be beneficial for Grace. Even though her investments are in fixed bonds, the economic and financial growth will contribute to the stable interests of investors to the bonds in Grace’s portfolio, while companies issuing bonds will be capable to pay off their obligations to Grace. The following table shows changes in Grace portfolio that are likely to occur within the following fifteen years.

The portfolio is carefully prepared and the choice of bonds made by Grace are basically right, although bonds 2 with zero-coupons raise doubts whether it is reasonable for Grace to purchase such bonds, which are unlikely to bring considerable profits to Grace. However, the choice of bonds 2 is in all probability determined by considerations of safety and reliability of such investments. Even though such investments will not bring considerable profits but they will definitely allow Grace to return her investments. At this point, it is possible to recommend Grace to sell bond 2 first since the longer she postpones the sale of these bonds the lower will be her capital since she has to take into consideration such factors as inflation, devaluation of money and other factors. As bonds 2 bring zero profit, they have to be sold as soon as possible to minimize capital losses.

As for other bonds, Grace can keep them until the end of the term of those bonds because they will accumulate the capital and all bonds have relatively high interest rate that makes them attractive for Grace as investor. At the same time, she should keep her eye on the bonds and the current situation in the market. If some turmoil is about to start, she would better sell out her bonds to avoid possible losses in case of a deep financial crisis. For instance, bonds 3 are expected to expire in fifteen years, while the financial market can hardly be stable for fifteen years. Therefore, Grace has two options. On the one hand, she can wait and keep her bonds, even if a financial crisis starts, in hope that by the time bonds expire, they will regain their pre-crisis value or gain even the higher value. Alternatively, she can sell her bonds, when she notices signs of the financial crisis.

In fact, both options have their strengths and drawbacks. On the one hand, retaining the bonds and keeping them throughout the crisis opens an opportunity to gain more since their price may increase after the end of the crisis. As a result, Grace will gain more, if she keeps her bonds throughout the financial crisis and waits until they reach the maximum profitability. On the other hand, selling bonds, when first signs of the crisis appear or she feels them, Grace secures her capital but she should come prepared to lose a part of her expected over $450,000 capital which she can gain if all bonds survive till the date she wants them to get her money back. In such a way, she may lose her potential profits but she will secure her capital because she will be certain that she will not lose her bonds. Instead, if she keeps her bonds, while companies, who issued those bonds, run bankrupt, Grace is likely to receive nothing or next to nothing for her bonds. In such a situation, her losses will be much more significant than her expected gains.

Thus, Grace has to make a decision on her own but it is highly recommendable to sell bonds 2 and keep other bonds, when their price will be attractive enough for Grace to sell. If Grace wants to secure her capital, she should sell her bonds as soon as she notices a financial crisis to come. Instead, if she is ready to take a risk, she may postpone selling her bonds till the date they expire and sell them with maximum profit for her. However, the latter strategy is quite risky taking into consideration the long terms of bonds and uncertain situation in the market.