a Change in yield for bond C. Nonparallel shift as follows (flattening of yield curve):
yield change bond A = yield change bond C+ 25 basis points
yield change bond B = yield change Bond C-25 basis points
b Change in yield for bond C. Nonparallel shift as follows (steepening of yield curve):
yield change bond A = yield change bond C-25 basis points yield change bond B = yield change bond C + 25 basis points
Performance is based on the difference in total return over a six-month investment horizon. Specifically, Bullet portfolio's total return-barbell portfolio's total return Therefore, a negative value means that the barbell portfolio outperformed the bullet portfolio
Question (a) Which portfolio is the better investment alternative if the yield curve shifts in a parallel fashion and the investment horizon is six months?
Question (b) You are told that these two portfolios, the bullet portfolio and the barbell portfolio have same dollar duration yet from the table, we can conclude that their performance are not the same. Why do you think this is the case?
Question (c) What conclusion can you make in the flattening (third column) and steepening (fourth column) of the yield curve?
