Forecast interest rate parallel increase spread narrow low interest rate volatility a barbell portfolio have a greater convexity than a bullet portfolio with identical duration Judge which portfolio is more appropriate a) short duration bullet b) short duration barbell c) long duration bullet d)long duration barbell Can someone give me insight view?
A I remember seeing the problem before and I said WTF. The explaination was more like when interest rate falls, bullet with short term rate does better job than barbell or something.
I am having trouble understanding the question. Could you pls. rephrase it and post again? Thanks
from 2007 sample Version 3 Q17 Table with three asset allocation from 3 Fix managers Interest rate parallel rise 25bp spread narrow for all the spread products low int rate volatility a positive yield curve with a yield spread of 150bp between 2Y to 10Y bonds, implying a barbell will have a greater convexity than a bullet with identical duration A. Short duration bullet B. Short duration barbell C. long duration bullet D. long duration barbell
First, decide whether you want to go for long term or short term securities. As interest rates are expected to increase, go for short term… So C and D are out… Then Parallel interest rate movement will have largest impact on price of a bond (to the extent of 90%) so this factor is most important and overshadows narrowing of spreads. Interest rate volatility is relevant for bonds with call (like MBS) which we don’t have in the Q. Convexity covered above. So A. short duration bullet strategy will be most preferred.