As per schweser, i think we have 2 contradicting statements: 1. “As long as the portfolio manager matches the duration & convexity of the portfolio to the liability, wheather he uses bullets or barbell stratergy would make no difference” This statement is FALSE. 2. “A Barbell stratergy exploits a flattening of the yeild curve but can immunize a portfolio against interest rate risk in a manner similar to bullets”. This statement is TRUE if someone can clarify…
Immunization tries to balance reinvestment risk with risk associated to price loss (interest changes and associated reinvestment income and portfolio value changes). Barbell portfolios are more susceptible to immunization risk (more payments are exposed to reinvestments), bullet portfolios are less since less amount of coupon payment exposed to reinvestment risk. Regarding second statement, if yield curve is flat, reinvestment risk is same for both barbell and bullet portfolios.