Flashcards in Fin 4319-Record A8 Deck (10):
how to compute duration of portfolio?
take weighted average of duration of individual assets
what if you're convinced interest rates going to fall?
lengthen duration, rates fall, bonds rates will rise, you want long duration bonds, sell short bonds to buy long bonds
what if you're convinced interest rates going to raise?
shorten duration, sell long bonds and buy short term bonds like money markets
how do you get a negative duration?
sell long term bonds and short-sell short term bonds
what is bullet strategy?
buy bond duration of 5 years
what is barbell strategy?
half portfolio in cash, half in bonds 10 year, so weighted average is 5 years
when do you use barbell strategy?
when you expect rates to rise and flatten, when short term rates increase faster than longer term and the yield curve flattens
when you invest in a duration longer than your investment horizen
price risk dominates - bet that rates will fall or same
what if your duration of portfolio is shorter than your investment horizon
re-investment risk dominates - bet that rates will rise