Current portfolio in anticipation of interest rate change

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Reference no: EM131933618

Suppose you are managing a bond portfolio that has a Macaulay Duration of 14 years. You predict that market interest rates are going to increase significantly next quarter. You decide to sell some of your current portfolio in anticipation of the interest rate change. You call your bond dealer and he has two zero coupon bonds for sale that fit your portfolio’s investment criteria. One bond has 20 years to maturity and the other has 5 years to maturity. You want this trade to reduce the impact of the change in interest rates on your bond portfolio. Which bonds do you choose to sell? (Long or short duration?) Which bond will you purchase? (The 20 year or the 5 year?) Briefly explain why. Thinking about the relationship between duration and price volatility will help.

Reference no: EM131933618

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