Question:

In this unit we learned to relate the differences between passive and active portfolio management, use duration and convexity to measure the interest rate sensitivity of a bond or bond portfolio, break down bond portfolio returns and use conventional approaches to adjust for risk, and analyze a bond portfolio manager's performance.

Lets extend the discussion by examining the practical implications of these concepts. The ability to immunize a bond portfolio is very desirable for bond portfolio managers in some instances.

Here is the question

Assuming a change in interest rates over time, explain the two risks faced by the holder of a bond.