FI Questions

Question 1

Duration management shortens portfolio duration in anticipation of rising rates and lengthens portfolio duration in anticipation of declining rates. What measure of duration is being referred to here?

Answer 1

Macaulay Duration.

Macaulay duration is a measure of time, we can shorten and lengthen a time period. Whilst Modified Duration and Effective Duration are sensitivities, not measure of time.

Question 2

in order to fully invested fixed income portfolio to alter duration with a single directional transaction, i.e. either buying something or selling something, but not both, it could not

Answer 2

Increase duration without the use of derivatives.

it could
use derivatives to alter portfolio duration
or decrease duration without the use of derivatives

Question 3

With the constraint that any portfolio structure choice must result in a portfolio duration that is matched to the duration of the benchmark, which portfolio structure will add the most convexity?

Answer 3

A more barbelled than the benchmark

Longer dated bond will have more convexity, by matching the duration of the portfolio to that of the benchmark, a more barbell portfolio will have more convexity since it requires more weighting in the long end of the curve