Fin 4319-Record A8 Flashcards

1
Q

how to compute duration of portfolio?

A

take weighted average of duration of individual assets

macaulay duration

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2
Q

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

A

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

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3
Q

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

A

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

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4
Q

how do you get a negative duration?

A

sell long term bonds and short-sell short term bonds

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5
Q

what is bullet strategy?

A

buy bond duration of 5 years

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6
Q

what is barbell strategy?

A

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

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7
Q

when do you use barbell strategy?

A

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

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8
Q

when you invest in a duration longer than your investment horizen

A

price risk dominates - bet that rates will fall or same

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9
Q

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

A

re-investment risk dominates - bet that rates will rise

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10
Q

What if you want to avoid interest rates?

A

immunization - set duration of portfolio equal to investment horizon

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