Mitigating Interest Rate Risk in Fixed Income Portfolios

Very Hard Managing Fi Portfolios Interest Rate Risk

As a fixed income portfolio manager at a large asset management firm, you are tasked with adjusting the duration of your portfolio in anticipation of changing interest rates. Currently, your portfolio has a modified duration of 5 years, and you are concerned that a potential rate hike by the central bank will adversely affect the value of your bonds. You are considering the following options to mitigate interest rate risk:

1. Shorten the portfolio's duration by selling longer-term bonds and replacing them with shorter-term bonds.

2. Implement a bond swap strategy, exchanging high-coupon bonds for zero-coupon bonds of equivalent duration.

3. Create a laddered bond portfolio that involves staggering the maturity dates of bonds.

Which of these strategies will most effectively reduce the portfolio's exposure to interest rate risk?

Shorten the portfolio's duration by selling longer-term bonds and replacing them with shorter-term bonds.

Implement a bond swap strategy, exchanging high-coupon bonds for zero-coupon bonds of equivalent duration.

Create a laddered bond portfolio that involves staggering the maturity dates of bonds.

Hint

Submitted13.6K

Correct13.0K

% Correct96%