What exactly is it? I know you have securities on the short and long end of the spectrum. Is there anything else to it, I have heard that you have credit risk in the short end and treasury in the long ends and you weight one higher then the other, ie more weight placed on the longer term bonds. Are any of these standard or is that just what people do since schweser seems to think some of these are standard characteristics of a barbell. thanks.
usually you have credit at short and risk free at long (that is from schweser)
is it convention to weight them same/different?
Yeah…looking over this right now. i think Schweser does a bad job on this. It only tells you what it is as CSK said but not when to use it. I think its used when the yield curve is relatively flat because you have some yield pickup although i don’t think that was ever mentioned in Schweser. Came across this on Sample Exam 2 and got smoked. Will study tomorrow and let you know more.
AC123 Wrote: ------------------------------------------------------- > Yeah…looking over this right now. i think > Schweser does a bad job on this. It only tells you > what it is as CSK said but not when to use it. I > think its used when the yield curve is relatively > flat because you have some yield pickup although i > don’t think that was ever mentioned in Schweser. > > Came across this on Sample Exam 2 and got smoked. > Will study tomorrow and let you know more. well you can reason logically if long end decreases by more then shor tend rises you will get gain as long end duration > short end duration. Barbell is used in Profit Maximization when you expect flatenning of yield curve (that is what i think)
So a barbel strategy is used if you are benchmarking to an index right because it wouldn’t really work if you have a liabilitiy that you are trying to immunize. I think there was a question about a barbel vs a bullet on the exam, need to check tomorrow because I don’t have the answer key on me
AC123 Wrote: ------------------------------------------------------- > So a barbel strategy is used if you are > benchmarking to an index right because it wouldn’t > really work if you have a liabilitiy that you are > trying to immunize. I think there was a question > about a barbel vs a bullet on the exam, need to > check tomorrow because I don’t have the answer key > on me ofcourse it will work Duration matches liability and PV matches liability too. You are just willing to take more reinvestment risk to reap higher returns (if curve is expected to flatten)
Duration only works for parallel shift in yield curves but barbel is trying to bet a steepening so duration wouldn’t really work right? If you have a liab with duration 8 years, corp at 6 and treasury at 10 if parallel shift then it would be immunized but like you said you are expecting a yield curve flattening so duration wouldn’t be an accurate measure?