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Rising Rates Solutions
You cannot invest directly in an index.
Tapering: A shift in monetary policy by which the Federal Reserve would begin decreasing the amount of bonds it purchases.
Credit risk: The risk that a borrower will not meet their contractual obligations in conjunction with an investment.
Investment Grade – A rating given to a municipal or corporate bond. It is a relatively favorable rating by either Moody’s or Standard & Poor’s indicating a higher chance an issuer performs interest and principal obligations as promised by the terms of the debt issuance.
Interest rate risk: The risk that an investment’s value will decline due to an increase in interest rates.
Futures: Reflects the expected future value of a commodity, currency or Treasury security.
Barclays U.S. Aggregate Index (“Barclays Agg,” “Agg”): Represents the investment-grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, as well as mortgage and asset backed securities.
Bank of America Merrill Lynch 0-5 Year U.S. High-Yield Constrained Index: Tracks the performance of short-term US dollar denominated below investment grade corporate debt publicly issued in the US domestic market.
Duration: A measure of a bond’s sensitivity to changes in interest rates. The weighted average accounts for the various durations of the bonds purchased as well as the proportion of the total government bond portfolio that they make up.
Net Asset Value (NAV): The calculated assets minus liabilities divided by shares outstanding. NAV is the straightforward account of the actual assets in the fund.
Credit spread: The portion of a bond’s yield that compensates investors for taking credit risk.
Hedge: Making an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract.
Volatility: A measure of the dispersion of actual returns around a particular average level.
Tightening: a decline in the amount of compensation bond holders require to lend to risky borrowers. When spreads tighten, the market is implying that borrowers pose less risk to lenders.
Short: The sale of a borrowed security, commodity or currency with the expectation that the asset will fall in value, the opposite of Long (or Long Position).
Long: The buying of a security such as a stock, commodity or currency, with the expectation that the asset will rise in value, the opposite of Short (or Short Position).
Slippage: The difference between the expected price of conducting a transaction compared to the actual execution price.
10-year interest rate was below 2.4% from August 22, 2014-August 29, 2014. Source: Bloomberg.