Question #38

Reading: Reading 25 The Term Structure and Interest Rate Dynamics

PDF File: Reading 25 The Term Structure and Interest Rate Dynamics.pdf

Page: 15

Status: Correct

Correct Answer: B

Part of Context Group: Q38-40 First in Group
Shared Context
- Based on Forecast 1, what is the most appropriate expected change in the shape of the yield curve? A) A bullish steepening. B) A bearish steepening. C) A bearish flattening.
Question
What would be the most appropriate duration-neutral strategy based on information presented in Forecast 2?
Answer Choices:
A. Rotate into a barbell strategy
B. Rotate into a long-maturity bullet portfolio
C. Rotate into a short-maturity bullet portfolio
Explanation
A bullish flattening of the yield curve would result from decline in longer-term yields. Current portfolio composition is described as intermediate-term bullet portfolio. A rotation into a barbell strategy (short- and long-term) would allow price gains on longer maturity portion of the barbell, while keeping the change duration neutral. A shift to longer-term bullet would be most advantageous but would increase the duration of the portfolio (not duration-neutral). A shift to short bullet portfolio would not capitalize the expectations in Forecast 2.
Actions
Practice Flashcards