Fin 4319-Record A8

Question 1

how to compute duration of portfolio?

Answer 1

take weighted average of duration of individual assets

macaulay duration

Question 2

what if you’re convinced interest rates going to fall?

Answer 2

lengthen duration, rates fall, bonds rates will rise, you want long duration bonds, sell short bonds to buy long bonds

Question 3

what if you’re convinced interest rates going to raise?

Answer 3

shorten duration, sell long bonds and buy short term bonds like money markets

Question 4

how do you get a negative duration?

Answer 4

sell long term bonds and short-sell short term bonds

Question 5

what is bullet strategy?

Answer 5

buy bond duration of 5 years

Question 6

what is barbell strategy?

Answer 6

half portfolio in cash, half in bonds 10 year, so weighted average is 5 years

Question 7

when do you use barbell strategy?

Answer 7

when you expect rates to rise and flatten, when short term rates increase faster than longer term and the yield curve flattens

Question 8

when you invest in a duration longer than your investment horizen

Answer 8

price risk dominates - bet that rates will fall or same

Question 9

what if your duration of portfolio is shorter than your investment horizon

Answer 9

re-investment risk dominates - bet that rates will rise

Question 10

What if you want to avoid interest rates?

Answer 10

immunization - set duration of portfolio equal to investment horizon