Price risk the same or higher then bulltet portfolio (vs liability) What about reinvestment risk? I would say reinvestment risk is higher and price risk is higher too Price risk is yield curve risk (twists) and interest rate risk (shifts) Am i correct here?
all i know about barbell portfolio is that it’s good when the yield curve is flat.
it is good when you expect yield curve to flatten, not when it is currently flat. So my question still remains also what is the name of risk for parallel shifts of interest rate curve. For twists it is Yield Curve Risk
Without accounting for liab, I’d say price risk is same, since I presume they have same duration? Why do you bring liabs into the mix? Thats a whole diff question isnt it? If duration’s the same, then reinvestment risk higher for barbell.
Immunization Risk?
agree with to4t, if duration is the same, price risk should be more or less equal but I would go for higher reinvestment riskas, you not only invest coupons at lower reinvestment rates, but also you must reinvest the whole notional of the “shorter” bond at lower reinvestment rates
For Barbell price risk -> lower. Reinvestment risk -> higher For Bullet price risk -> higher. Reinvestment risk -> lower because reinvestment risk is always minimized by one principal payment at maturity. Price risk is the opposite.
Price Risk - the risk that the bond will be sold at a gain/loss Reinvestment risk - the first that reinvestmetn income on the coupons will increase/decrease b/c they were reinvested at higher/lower interest rates. To immunize you want to have a duration equal to liability and Cashflows closely disbursed around paymetn date. So Barbell has Higher Reinvestmetn Risk b/c it faces Higher Reinvestmetn risk and Also has higher Price Risk, I believe.
bigwilly Wrote: ------------------------------------------------------- > Price Risk - the risk that the bond will be sold > at a gain/loss > Reinvestment risk - the first that reinvestmetn > income on the coupons will increase/decrease b/c > they were reinvested at higher/lower interest > rates. > > To immunize you want to have a duration equal to > liability and Cashflows closely disbursed around > paymetn date. So Barbell has Higher Reinvestmetn > Risk b/c it faces Higher Reinvestmetn risk and > Also has higher Price Risk, I believe. good willy, good, but my question to you is what is the name of the risk for parallel curve shifts? For twists it is yield curve risk. AFAIK Price risk is both yield curve shifts and twists, so from that price risk is higher in barbell
3rd & Long Wrote: ------------------------------------------------------- > For Barbell > > price risk -> lower. > > Reinvestment risk -> higher > > For Bullet > > price risk -> higher. > > Reinvestment risk -> lower > > > because reinvestment risk is always minimized by > one principal payment at maturity. Price risk is > the opposite. Read willys reply. Both risks are higher IMHO.
Interest Rate Risk = Parrellel shift
bigwilly Wrote: ------------------------------------------------------- > Interest Rate Risk = Parrellel shift that is not what risk glossary is saying…
haha… Change in the “Level” of interest rates = Parrallel I believe.
OK I’m convinced. Barbell price is risk is (marginally) higher, even if you have same duration. Parallel shifts --> interest rate risk
stickin with my guns… price risk is the change in bond value due to a int rate change.For a bullet, the larger principal amount is paying at maturity. the larger principal and longer maturity translates to a higher duration… (this reflects a parallel rate change) if not parallel depends on the change in short vs. long term rates…
If cash flows are concentrated around the horizon (as in a bullet), reinvestment risk and immunization risk will be low. If there is a high dispersion of cash flows about the horizon date (as in a barbell strategy), reinvestment risk and immunization risk will be high.
But if you use a Zero-Coupon bond for the Bullet you have NO price Risk or Reinvestmetn Risk… BUT if you use a Barbell you will have to Reinvest the Principal of the lower Duration bond during its life, so you will always have Reinvestmetn risk with a Barbell and Price risk.
^my comment is in regards to 3rd and Long not Rudeboi