This thing is killing me. Just took the freebie test - heavily skewed towards duration-related questions. Final score: 50%. Now I know my weak spot. Me thinks me needs to spend a wee bit more time on SS 8 & 9.
i know - so depressing … I am browsing for some new shoes, this will cheer me up
10-20% of the exam will be fixed income… that’s up to 4 vignettes of material.
jamespucyk Wrote: ------------------------------------------------------- > 10-20% of the exam will be fixed income… that’s > up to 4 vignettes of material. and boy, do i love fixed income or what 
That’s the idea… learn to love it
jamespucyk Wrote: ------------------------------------------------------- > That’s the idea… learn to love it “Love the man’s fart… LOVE IT!” - Peter Griffin
Someone please explain this to me: Spong’s fourth statement indicates that Vertex expects a 25 basis point decline in short-term rates and a 75 basis point increase in long-term rates. A short duration bullet strategy is most appropriate to take advantage of this forecast. The bullet will outperform the barbell because the barbell will experience lower reinvestment rates longer than the bullet and the barbell will also suffer a large capital loss on the long-term position.
I love Duration. I got the Duration question with a single payment correct in L2.
Barbel will experience low reinvestment rates for long as barbel has a lot of short duration bonds that need to be reinvested Barbel will experience large capital loss as at his significant PV at a long End (Which will exhibit larger loss due to larger duration and bigger long term rate increase) Short duration bullet will benefit from dropping interest rates
Given the drop in short-term rate and rise in long-term rate…first of all, you know a barbell won’t do well since the loss on long-term bond will be more than the gain on the short-term bond. (duration on long term bond is bigger, therefore more sensetive to rates movement). Since the expectation is short term rate drop, you are better off putting all you money in short-term bullet.
Does the barbell strategy equally weight the long and short end of the term structure? or does it overweight one over the other? Remember seeing a question on this somewhere in Schweser that confused me. I do get that the best strategy here would be the bullet strategy…makes sense.
I don’t think a barbell need to have a equal weight in long and short end. I belive the PM can tilt the weight depend on his interest rate out look. The balance must be between duration matching (if you are in a ALM setting) and YC managment.
Got it - makes perfect sense now. I shall go kick myself in the a$$ now for not knowing such a simple concept.
Bullet portfolios are easy to analyze. Can any of the FI gurus here help with guidelines about how to think about Barbell portfolios. When do you want to use a Barbell portfolio?
>When do you want to use a Barbell portfolio? When you expect ST rates to increase (easy to reinvest at high rates) and LT rates to drop (will gain in LT bond).
tanyusha Wrote: ------------------------------------------------------- > >When do you want to use a Barbell portfolio? > When you expect ST rates to increase (easy to > reinvest at high rates) and LT rates to drop (will > gain in LT bond). Hmm will this outperform LT bullet? hmm
I think the idea is that this will outperform a bullet with the same duration as the barbell. So Barbels are good when you expect the curve to flatten. or does it have to specifically be when ST rates increase as it flattens?