Fixed-Income Portfolios: Laddered, Bullet, or Barbell

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What is a key advantage of a laddered portfolio?

Constant need for reinvestment

High market price volatility

Dependence on short-term securities only

Protection from shifts and twists in cash flows (correct)

How are bonds managed in a laddered portfolio over time?

Matured bonds are reinvested at lower rates

Bonds are sold immediately upon maturity

Matured bonds are reinvested at higher rates (correct)

Bonds are reinvested randomly without considering rates

What does dollar cost averaging have in common with laddered portfolios?

Focus on short-term securities only

Dependency on market price volatility

Ignoring interest rates in reinvestment

Similarity in reinvesting funds over time (correct)

Which feature of the laddered portfolio is evident in Exhibit 13?

Convexity Signup and view all the answers

How does a laddered portfolio balance interest rate risks?

By reinvesting matured bonds at varied rates Signup and view all the answers

What is the primary benefit of diversifying cash flows across the time spectrum?

Protection from shifts and twists Signup and view all the answers

What is the purpose of liability-driven investing (LDI)?

To ensure adequate funding for liabilities like insurance portfolios or pension plans Signup and view all the answers

How is immunization strategy related to liability-driven investing?

It is a special case of interest rate hedging in LDI Signup and view all the answers

What is a key advantage of index-based investing in fixed-income markets?

Greater diversification across fixed-income markets Signup and view all the answers

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 Signup and view all the answers

Which investment technique involves tailoring investments to match a specific liability profile?

Immunization strategy Signup and view all the answers

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 Signup and view all the answers

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 Signup and view all the answers

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 Signup and view all the answers

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 Signup and view all the answers

How does a more convex portfolio generally perform compared to a less convex portfolio?

It generally outperforms a less convex portfolio Signup and view all the answers

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 Signup and view all the answers

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 Signup and view all the answers

Fixed-Income Portfolios: Laddered, Bullet, or Barbell

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