Managing Interest Rate Risk in Fixed Income Portfolios

Very Hard Managing Fi Portfolios Interest Rate Risk

As a fixed income portfolio manager at Alpha Capital, you are tasked with managing a $500 million bond portfolio primarily composed of 10-year U.S. Treasury bonds and investment-grade corporate bonds. Recently, you've noticed intensifying market speculation regarding an upcoming Federal Reserve interest rate hike, which is anticipated to be announced in the next FOMC meeting. Concerned about interest rate risk, you are evaluating strategies for minimizing the portfolio's exposure to potential declines in bond prices.

During your analysis, you consider three different strategies:

Lengthening the duration of the portfolio by adding long-term corporate bonds.

Using interest rate swaps to receive fixed rates and pay floating rates.

Implementing a barbell strategy by selling intermediate bonds and increasing investments in both short-term and long-term bonds.

Hint

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