Fin 4319-Record A8 Flashcards Preview

Finance > Fin 4319-Record A8 > Flashcards

Flashcards in Fin 4319-Record A8 Deck (10):
1

how to compute duration of portfolio?

take weighted average of duration of individual assets
macaulay duration

2

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

3

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

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

4

how do you get a negative duration?

sell long term bonds and short-sell short term bonds

5

what is bullet strategy?

buy bond duration of 5 years

6

what is barbell strategy?

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

7

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

8

when you invest in a duration longer than your investment horizen

price risk dominates - bet that rates will fall or same

9

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

re-investment risk dominates - bet that rates will rise

10

What if you want to avoid interest rates?

immunization - set duration of portfolio equal to investment horizon