Question #66
Reading: Reading 25 The Term Structure and Interest Rate Dynamics
PDF File: Reading 25 The Term Structure and Interest Rate Dynamics.pdf
Page: 27
Status: Unattempted
Correct Answer: A
Question
Jon Smithson is a bond trader at Zezen Bank. The spot rate curve is currently flat. Smithson expects that the curve will become upward sloping in the next year. Based on this expectation, the least appropriate active strategy for Smithson would be to:
Answer Choices:
A. increase the duration of the portfolio
B. sell all the long-term bonds in the portfolio and reinvest the proceeds in shorter- maturity bonds
C. reduce the duration of the portfolio
Explanation
The question is asking for least appropriate strategy. Given an expectation of steepening
of the yield curve, an active bond manager would reduce the duration of the portfolio.