This is what I understand about bullet portfolios - portfolios heavily weighted in the intermediate maturity sector. On page 388 of Volume 3, what is meant “bullet structures with different maturities” ? Why should a front end bullet be suitable for “barbellers” ? Thanks !
I don’t have the volume in front of me, but a barbell fixed income portfolio is essentially a portfolio desinged around two time frames. Cash flows in barbell portfolio’s are structured to be recieved around a shorter maturity and a longer maturity. I had trouble following your question, but a barbell portfolio has essentially a bullet payment at the short duration and a bullet at the long… does this help or did i answer a completely different question? Also, bullet portfolio’s can be weighted to any maturity (not just intermediate as you suggested)
I guess I am plain confused… I referred to Fabozzi for understanding Bullet and Barbell in the first place. May be that is what I need to be clear about and then think about how they are used as relative value methods ? Thanks… I will read through the pages again.
By bullet bonds, they are referring to those where the entire principal amount of the bond is due at the maturity date (Volume 4 page 57), as opposed to callables, MBS, or securities with sinking fund provisions. I have also noticed that when they use the term bullets in the level 3 curriculum they are usually referring to fixed cupons rather than variable rate bonds. A barbel of course, concentrates principal payment around two different maturities, and can be seen as a way to mitigate re-investment risk in the case of yield curve twists. The sentance that you read is merely stating that front end bullet bonds, are popular for investors who are pursuing a barbell strategy -for the shorter end of the barbell-, of course you are going to use medium or long-term maturity instruments for the other maturity around which you want the barbell to concentrate. Bullets are better than callables, putables, RMBS, bonds with sinking fund provisions, or regular amortizations simply because you can plan to recieve a certain amount of capital on a certain date, which greatly facilitates your immunization strategy and simplifies how you deal with prepayment or re-investment risk.