Reading 35 . Didn't understand the answer to a Question

Canan Enver is evaluating a portfolio of zero-coupon bonds with maturities of 1, 5 and 10 years. Enver is analyzing what happens as rates change across the yield curve. He assumes the following portfolio sensitivities to factors given in Table 1. The portfolio has equal weightings in each key rate duration and an effective duration of 5.33. Enver’s supervisor asks him to examine the effect on the portfolio return if rates rise evenly across the curve and when the curve flattens but does not twist. Table 1: Factor Movements and Key Rate Durations Year 1 5 10 Parallel 1 1 1 Steepness 1 0 -1 Curvature 1 0 1 Key Rate Durations 0.33 1.67 3.33 Based on Table 1 and the supervisor’s assumptions, the impact on the portfolio would most likely be a loss in value from changes in: A. level and a loss from changes in steepness. B. level and a gain from changes in steepness. C. steepness and a gain from changes in curvature. A is correct a parallel shift of the yield curve would result in a loss across each key rate duration given a sensitivity of 1. For example, a 100 basis point (bps) parallel shift would result in 5.33% (approximately) loss in value. A flattening of the yield curve in the long end would result in a loss given a sensitivity of –1. For example, a 100 bps decline in the 10-year key rate duration would result in a loss of approximately 1.11% (–100 × –0.01 ×–3.33 × 0.333). There is no impact from curvature, since the curve did not “twist”. Section 6.4. LO.l. what I didn’t understand is that if the steepness is -1 in 10-year rate i.e. the long-term rate went down therefore there should be a gain in value then why is it a loss from changes in steepness.

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