You are a bond portfolio manager and you are deciding betwee…
You are a bond portfolio manager and you are deciding between adding Apple debt or Sears debt to your holdings. Apple currently has a ytm (yield) of 2% and Sears (because it is close to bankruptcy) has a ytm of 13%. Now, you think both are appropriately valued in terms of their risk characteristics, but what you are really concerned about is each bond’s exposure to the Fed’s up-coming decision to raise/lower rates. If you really do not want to be exposed to this type of Fed risk, which bond do you pick (Apple or Sears) and why? What type of Apple or Sears bond are you going to buy in the marketplace (maturity and payment structure) if you wish to avoid exposure to the Fed’s decision and why?