In Q6 for the flattening of the yield curve the following explaination was given:

A flattening of the yield curve in the long end would result in a loss given a sensitivity of -1. For example, a 100 bp decline in the 30 year key rate duration would result in a loss of approximately 2.9% (-100*-1*-8.7*.333).

Where

Year 5 10 30

Steepness 1 .5 -1

My question is why did they consider only the 30 year bond with the -ve sensitivity? Am I missing something here?

Thanks for the reply. I am sorry but I still dont get it. The question asks for the effect of the flattening of the yield curve on the whole portfolio where all 3 securities are equally weighted. Then why was the effect on 30 year bond only considered?

Not sure if this is right, but when I look at the example the topic test provided, they’re missing a decimal. I believe the calculation should be .01 x -1 x -8.7 x .333; where the .01 is the 100 basis point decline, the -1 is the sensitivity, 8.7 is the rate duration and .333 is the weighting, the calculation came out to .028877 or something like that. Again, not sure if this is right, happy to have someone correct me if this is not the case.