“Consider a portfolio of zero-coupon bonds that mature at different times in the future. Changes in interest rates are not always parallel across maturities, so let’s analyze what happens as rates change across the yield curve. Let’s assume that the portfolio has sensitivities to factors as provided in Exhibit 3. The portfolio has equal weightings in each key rate duration and an effective duration of 4.7. I would like you to assess the impact on the return of the portfolio if rates rise evenly across the curve and also when the curve flattens but does not twist.”
Exhibit 3 Factor Movements per One Standard Deviation Shift and Portfolio Key Rate Durations
Year 5 10 30
Parallel 1 1 1
Steepness 1 0.5 –1
Curvature 0.5 0 1
Rate Durations 1.8 3.6 8.7
Assuming rates change as described by Akron and based on Exhibit 3, the impact on the portfolio as outlined in Module 6 would be most likely be a loss in value from changes in:
A level and a gain from changes in steepness.
B steepness and a gain from changes in curvature.
C level and a loss from changes in steepness.
The answer is 3 as per cfai
But I think it should be 1… Because the 30 year key rate duration is the highest and greater than the combined duration of 5 and 10 years and because the steepness has resulted in negative ytm of 1% for 30 years… it should be -(1 x 1.8 x .33) - (0.5 x 3.6 x 0.33) - (-1 x 8.7 x .33) = gain due to change in steepness!!
Can any one clarify… This is really making me crazy
ICFAI answer is correct. The reason steepness is a loss, is because the flattening causes year 30 rates to drop —> should lead to a gain. However, the duration at 30 year is -1, so it’s the opposite sign. That means a loss in price.
125mph I feel like you’ve done plenty mock exams and practice problems up until now, definitely one of the most I’ve seen on the forum, do you mind sharing what your strategy is for the next few days?
Sure, my strategy is just do a few more mocks until Thursday, and break on Friday. I’m recycling mocks at this point but I’m using the ones I did in May so that I don’t recognize a question as much.
I believe repetition is key.
Last month I was missing a lot more questions but now I’ve done so many, I’m quicker to recognizing the solution and also not making stupid mistakes. (For example question provides FCFF1, but I was discounting as if it was FCFF0 ). I try to stay away from obscure, rare or overly complicated ideas. I know enough to get the question right and maybe a little deeper in case they really try to throw me off.
I think going to deep in the topics is a great way to not retain anything!