) 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