CONTROL OF THE INTEREST RATE RISK IN A BOND PORTFOLIO AND GOAL PROGRAMMIN
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The interest rate risk ofa bond investment is divided into the price and reinvestment risks. It has shown that reduction ofone risk can be achieved only by increasing the other risk by the same amount. Therefore, control ofthe interest rate risk should be dealt with constructing a bond portfolio with a desirable combination ofthe two risks depending on expectation on future interest rates and also subject to various investment goals and constraints. This paper provides a prototype goal programming model which can be extended to control the interest rate risk of a broad range offinancial assets
Abstract
The interest rate risk ofa bond investment is divided into the price and reinvestment risks. It has shown that reduction ofone risk can be achieved only by increasing the other risk by the same amount. Therefore, control ofthe interest rate risk should be dealt with constructing a bond portfolio with a desirable combination ofthe two risks depending on expectation on future interest rates and also subject to various investment goals and constraints. This paper provides a prototype goal programming model which can be extended to control the interest rate risk of a broad range offinancial assets