Fin 4319-Record A8 Flashcards Preview

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Flashcards in Fin 4319-Record A8 Deck (10):

how to compute duration of portfolio?

take weighted average of duration of individual assets
macaulay duration


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


What if you want to avoid interest rates?

immunization - set duration of portfolio equal to investment horizon