You expected a cut in interest rate, the yield curve will change where short term interest rate
Question:
You expected a cut in interest rate, the yield curve will change where short term interest rate will decrease 200bps, medium will decrease 160 bps and long term decrease 150bps.
Bond Modified duration Convexity measure
A Short 1.3 2
B Medium 6 30
C Long 14 400
The bonds in the table are zero coupon bonds and duration are in years.
Portfolio Strategy A: Invest 10m in bond A and 10m in bond c.
Portfolio Strategy B: Invest 20m in bond b.
Calculate the expected return of each strategy, and explain which strategy should be used to deal with the decrease in interest rate. And does the strategy increase or decrease forward looking tracking error of the portfolio?
Modern Portfolio Theory and Investment Analysis
ISBN: 978-1118469941
9th edition
Authors: Edwin Elton, Martin Gruber, Stephen Brown, William Goetzmann