QUIZZ 7
1. Below are 2 portfolios with a market value of $500 million. The bonds in both
portfolios are trading at par value. The dollar duration of these two portfolios is the same.
Portfolio 1
Issue Years to maturity Par value (in milions)
A 2 120
B 2.5 130
C 20 150
D 20.5 100
Portfolio 2
a. Which portfolio can be characterised as a bullet portfolio? Why ? ( 1 point)
b. Which portfolio can be characterised as a barbell portfolio ? Why ? (1 point)
c. The 2 portfolios have the same dollar duration; explain whether their performance will be the same if interest rate change. (2 points)
2. Explain why you agree or disagree with the following statements (start your answer with “agree” or “disagree” and then explain why.
“It is always better to have a portfolio with more convexity than one with less convexity.” (2 points)
“A bullet portfolio will always outperform (do better) a barbell portfolio with the same duration if the yield curve steepens”. (2 points)
Issue Years to Maturity Par value (in millions)
E 9.7 200
F 10 230
3. Why might the investment objective of a portfolio manager of a life insurance
company be different from that of a mutual fund. (Be specific in your answer and use key words) (3 points)
4. What are the 3 sources of income from a bond ? (1 point)
5. How does convexity lead to a more precise bond pricing ? Illustrate with a graph(3 points)
6. How does the yield spread between long term and short term rates react in a steepening yield curve environment ? Explain and illustrate with graph (2 points)
