sample 2 qq8

Given a one-time instantaneous yield curve shift with short-term rates (maturities of 6 years or less) rising and long-term rates (maturities of 10 years or greater) falling, then: the shorter-term maturities in the barbell portfolio will benefit more than the bullet portfolio from higher reinvestment rates, isn’t there more reinvestment risk for barbell in short term???

IF rates are Rising, this will hurt Bonds, so the ST in teh barbel HURTS

the shorter term maturities in the barbell will benefit because interest rates are rising and because you are able to roll over those bonds into higher int rates. when int rates rise and duration of assets is less than duration of liabilities; reinvestment risk goes down. however a barbell does have higher reinvestment risk, which is why we would prefer a bullet.

Yes, you will be able to roll over in higher yields, BUT you are taking a loss on your portfolio that is not being rolled over. You would need the Higher Yields gained from reinvestment to be greater than the costs to trade plus the loss on the principal due to the depression of bond prices. So in General. When ST Interest Rates are Increasing and LT Interest Rates are Decreasing a LT Bullet will OUTPERFORM a Barbell.