18 Questions
What is a key advantage of a laddered portfolio?
Protection from shifts and twists in cash flows
How are bonds managed in a laddered portfolio over time?
Matured bonds are reinvested at higher rates
What does dollar cost averaging have in common with laddered portfolios?
Similarity in reinvesting funds over time
Which feature of the laddered portfolio is evident in Exhibit 13?
Convexity
How does a laddered portfolio balance interest rate risks?
By reinvesting matured bonds at varied rates
What is the primary benefit of diversifying cash flows across the time spectrum?
Protection from shifts and twists
What is the purpose of liability-driven investing (LDI)?
To ensure adequate funding for liabilities like insurance portfolios or pension plans
How is immunization strategy related to liability-driven investing?
It is a special case of interest rate hedging in LDI
What is a key advantage of index-based investing in fixed-income markets?
Greater diversification across fixed-income markets
Why is creating and tracking an index in bond markets more challenging than in equity markets?
The depth and breadth of bond markets make index creation and tracking more challenging
Which investment technique involves tailoring investments to match a specific liability profile?
Immunization strategy
How do liability-driven investing and index-based investing differ in their approach?
LDI aims to match a specific liability profile, whereas index-based investing offers broader market exposure
What does the first derivative in the optimization problem lead to when minimizing the difference in the change of assets and liabilities?
Matching money duration and Interest Rate Immunization
Why should the dispersion of assets be as low as possible when immunizing multiple liabilities?
To mitigate the effect of non-parallel shifts in the yield curve
In what scenario should changes in the market value of the asset portfolio closely match changes in debt liabilities?
In a parallel shift of the yield curve
How does a more convex portfolio generally perform compared to a less convex portfolio?
It generally outperforms a less convex portfolio
Why is it important for the dispersion of assets to be greater than or equal to the dispersion of liabilities during immunization?
To minimize the effect of non-parallel shifts in the yield curve
What is the main purpose of immunizing multiple liabilities using interest rate risk hedging strategies?
To match changes in market value with debt liabilities under interest rate fluctuations
Test your knowledge on fixed-income portfolio strategies such as laddered, bullet, and barbell. Understand the benefits of using laddered portfolios for diversification across different time horizons.
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