Question 1 asks to summarize the pattern of returns from each movement. In the solution for 1, it says the yields on the intermediate maturities (5s, 7s and 10s) rise the most. Why is that and how do we know this?
Does the short end at 2s and 3s rise even more than that and the 10s and 30s rise the least? It’s a non-parallel shift up so how do you know what part of curve rises the most and the which the least?
Thanks
You have to read the question and see what it says the yield curve does. Does it say its steepening or flattening? Does it say its increasing in curvature. Based on that information, you would know if the short, intermediate or long term bonds are rising in yield or dropping.
Read the solution: the impact of a yield curve shift is greatest for the bullet portfolio and smallest for the barbell portfolio. Therefore, the yields on the bonds contained in the bullet portfolio move more than the yields on the bonds contained in the barbell portfolio. (Of course, you have to take into account the relative durations and percentages held in each portfolio, but the overall conclusion stems from the relative size of the impact.)
Got it. That was great S2000.
125mph – thanks as well!
My pleasure.