In in Government bonds, corporate bonds and Treasury bills.

In reviewing the measures in three of our companies we find that the most popular methodology organizations plan to offset its Interest Rate Risk exposure is a) by using derivative instruments or b) by using interest rate swap contacts. Since we have not seen any usage of any specialized derivative we would like to also recommend that in addition to their existing strategies to manage Interest Rate Risk exposure, Interest Rate Collar (derivative instrument) can also be looked into. An interest rate collar uses derivative procedure to hedge an investor’s exposure to interest rate fluctuations. The instrument sets a maximum cap value and a minimum-floor value which as boundaries on a given floating rate, like Prime rate or LIBOR. If the floating rate reaches above the maximum cap level, company is credited the difference. If floating rate falls below the minimum-floor level, the company is debited the difference. Finally another alternate procedure for organizations to decrease its exposure to interest rate is to issue bonds to raise capital. This was done by AAPL in November 2017 . The enterprise issued seven billion US dollars in debt with the objective of funding its three hundred billon US dollar shareholder program. The program includes dividend payments and share-buyback. Historically AAPL had borrowed from the bond market to reward its shareholders. We now look into the outlook for near future, 2018 and also the corporate bond market. In Figure 5.11 we see the trends in Government bonds, corporate bonds and Treasury bills. We see that the long term treasure yield curve is flattening, signaling a) weaker economy or b) Fed raising rates too quickly. Mostly the outlook looks neutral for 2018. As we know Fed has already planned for three more quarter-point increases in 2018. This may hurt traditional bond prices, however investments with floating coupon rates may benefit from future Fed rate hikes. High-grade investment-grade corporate bonds, may remain a fair alternative to equities, which are very expensive now. Bond market is expecting fewer rate hikes, on the view that economy is growing too slowly and inflation is so low. Figure 5.12 shows the typical impacts on increase in Fed rates. We can see that Fed funds rate and one-year Treasury rate track each other very closely, however the interest rate on a 10-year Treasury bond does not. So it is safe to conclude that the projected increase in fed funds rate for 2018 will successfully raise short-term interest rates but have a confined affect on long-term rates.

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