Yield Curve Strategies: Slope Analysis
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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?

  • 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?

  • 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?

  • 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?

    <p>Sell long-term bonds and buy short-term bonds</p> Signup and view all the answers

    A bull steepener is expected to occur. Which of the following statements is true?

    <p>Short-term yields will fall by more than long-term yields</p> Signup and view all the answers

    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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    Description

    Learn about yield curve strategies, including steepeners and flatteners, and how to position a portfolio to gain from changes in slope and interest rates.

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