) THE RISK THAT RAMIREZ NOTES IS PREVALENT IN CLIENT PORTFOLIOS IS MOST LIKELY

5.) The risk that Ramirez notes is prevalent in client portfolios is most likely:

A.

interest rate risk.

B.

cap risk.

C.

contingent claim risk.

Answer = C

When such assets as mortgage-backed securities have a contingent claim provision,

explicit or implicit, there is an associated risk. As rates fall, the security might have

coupons halted and principal repaid. This results in reinvestment risk and also limits any

potential upside as would be seen with a noncallable security. Mortgaged-backed

securities exhibit negative convexity. But corporate bonds, if noncallable, are positively

convex.

“Fixed-Income Portfolio Management-Part I,” by H. Gifford Fong and Larry D. Guin