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Questions and Answers
A portfolio is positioned to be duration neutral and gain from a steepening yield curve. Which of the following actions would achieve this?
A portfolio is positioned to be duration neutral and gain from a steepening yield curve. Which of the following actions would achieve this?
- Short long-term bonds and long short-term bonds (correct)
- Short bonds with a weighted average duration of 5 years and long bonds with a weighted average duration of 10 years
- Long long-term bonds and short short-term bonds
- Long bonds with a weighted average duration of 5 years and short bonds with a weighted average duration of 10 years
An investor expects a bull flattening of the yield curve. Which of the following actions would be consistent with this expectation?
An investor expects a bull flattening of the yield curve. Which of the following actions would be consistent with this expectation?
- Decrease duration to the portfolio by selling long-term bonds and buying short-term bonds (correct)
- Buy short-term bonds and sell long-term bonds with a similar duration
- Add duration to the portfolio by buying long-term bonds and selling short-term bonds
- Sell short-term bonds and buy long-term bonds with a similar duration
A bear steepener is expected to occur. Which of the following statements is true?
A bear steepener is expected to occur. Which of the following statements is true?
- Long-term yields will fall by more than short-term yields
- Long-term yields will rise by more than short-term yields (correct)
- Short-term yields will fall by more than long-term yields
- Short-term yields will rise by more than long-term yields
A portfolio is managed to be duration neutral and gain from a flattening yield curve. Which of the following actions would achieve this?
A portfolio is managed to be duration neutral and gain from a flattening yield curve. Which of the following actions would achieve this?
A bull steepener is expected to occur. Which of the following statements is true?
A bull steepener is expected to occur. Which of the following statements is true?
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Study Notes
Yield Curve Strategies
Slope Steepeners
- A steepener position is constructed as (+D, -D) in a portfolio
- Duration-neutral steepener gains from an increase in slope (∆slope ↑)
- Bull steepener adds duration to gain from both increasing slope (∆slope) and decreasing yield levels (∆levels ↓)
- Short-term yields fall more than long-term yields
- Bear steepener reduces duration to gain from both increasing slope (∆slope) and increasing yield levels (∆levels ↑)
- Long-term yields rise more than short-term yields
Slope Flatteners
- A flattener position is constructed as (-D, +D) in a portfolio
- Duration-neutral flattener gains from a decrease in slope (∆slope ↓)
- Bull flattener adds duration to gain from both decreasing slope (∆slope) and decreasing yield levels (∆levels ↓)
- Long-term yields drop more than short-term yields
- Bear flattener decreases duration to gain from both decreasing slope (∆slope) and increasing yield levels (∆levels ↑)
- Short-term yields rise more than long-term yields
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