Consider a portfolio of zero-coupon bonds that mature at different times in the future. Changes in interest rates are not always parallel across maturities, so let’s analyze what happens as rates change across the yield curve. Let’s assume that the portfolio has sensitivities to factors as provided in Exhibit 3. The portfolio has equal weightings in each key rate duration and an effective duration of 4.7. I would like you to assess the impact on the return of the portfolio if rates rise evenly across the curve and also when the curve flattens but does not twist.”
EXHIBIT 3
FACTOR MOVEMENTS PER ONE STANDARD DEVIATION SHIFT AND PORTFOLIO KEY RATE DURATIONS
Year 5 10 30 Parallel 1 1 1 Steepness 1 0.5 –1 Curvature 0.5 0 1 Key rate curations 1.8 3.6 8.7
Q. Assuming rates change as described by Akron and based on Exhibit 3, the impact on the portfolio as outlined in Module 6 would be most likely be a loss in value from changes in:
- level and a loss from changes in steepness.
- level and a gain from changes in steepness.
- steepness and a gain from changes in curvature.
As the value of curvature changes from 0.5 to 0 to 1, but there is no change in curvature.