Explain link between yield curve flattening or steepening

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Reference no: EM132172446

Question - Explain the impact of the steepening of the yield curve on two bonds portfolios. Both portfolios have equal Macaulay's duration. The first portfolio is designed as a bullet (100% allocation to the mid-maturity in the yield curve) and the other as a barbell (allocation split between the short and the long maturities in the yield curve). You must demonstrate your answer with an example

1. Explain the bullet and barbell strategy and why investor are indifferent between choosing one or the other when no expectations regarding changes in the terms structure.

2. Explain the link between yield curve flattening or steepening on the two investment strategies.

3. Show using an example: create the two portfolios and ensure durations are matched.

4. Explain how when yield curve flattens/steepens the effect on the two strategies.

Reference no: EM132172446

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