Fixed Income Portfolio Management Flashcards

Duration is primarily used in fixed income portfolio management to measure:

Answer: A bond's price sensitivity to changes in interest rates

Duration quantifies the approximate percentage change in a bond's price for a 1% change in interest rates, making it the primary measure of interest rate risk.

If a bond portfolio manager expects interest rates to rise, the appropriate adjustment would be to:

Answer: Decrease portfolio duration by shifting to shorter-maturity bonds

Shortening duration reduces interest rate sensitivity, so when rates rise, the portfolio loses less value than it would with a longer duration.

Convexity in a bond portfolio measures:

Answer: The curvature of the price-yield relationship, improving duration's accuracy for large rate moves

Convexity captures the non-linear (curved) relationship between bond prices and yields, providing a more accurate estimate of price changes for large interest rate movements than duration alone.

A bullet portfolio strategy concentrates bond maturities around a single target date, while a barbell strategy:

Answer: Splits holdings between very short-term and very long-term maturities

A barbell strategy holds bonds at two maturity extremes (short and long), providing flexibility and potentially higher yields than a bullet portfolio with similar overall duration.

Spread duration measures a bond portfolio's sensitivity to changes in:

Answer: Credit spreads

Spread duration quantifies the price impact of a change in credit spreads, helping managers assess credit risk exposure separately from interest rate risk.

Which of the following best describes an immunized bond portfolio?

Answer: A portfolio structured so that assets and liabilities have matching durations, protecting against interest rate changes

Immunization aligns the duration of assets with the duration of liabilities, ensuring that changes in interest rates affect both sides equally and protect the funding status.