Sample Questions
Question 1
Easy
A ladder portfolio allocates bond holdings:
Solution
A is correct.
A ladder portfolio distributes bond holdings evenly across a range of maturities (e.g., 1-year, 2-year, 3-year, through 10-year). As each short-term bond matures, the proceeds are reinvested at the longest maturity, maintaining the ladder. This provides regular liquidity, diversification across maturities, and a natural hedge against interest rate uncertainty.
A ladder portfolio distributes bond holdings evenly across a range of maturities (e.g., 1-year, 2-year, 3-year, through 10-year). As each short-term bond matures, the proceeds are reinvested at the longest maturity, maintaining the ladder. This provides regular liquidity, diversification across maturities, and a natural hedge against interest rate uncertainty.
Question 2
Medium
Key rate duration analysis is most useful for evaluating a portfolio's sensitivity to:
Solution
B is correct.
Key rate durations measure a portfolio's price sensitivity to yield changes at specific maturity points (e.g., 2-year, 5-year, 10-year, 30-year) on the yield curve. This is more informative than modified duration, which assumes parallel shifts. Key rate durations allow the manager to identify where on the curve the portfolio has the most exposure and to evaluate the impact of non-parallel shifts.
Key rate durations measure a portfolio's price sensitivity to yield changes at specific maturity points (e.g., 2-year, 5-year, 10-year, 30-year) on the yield curve. This is more informative than modified duration, which assumes parallel shifts. Key rate durations allow the manager to identify where on the curve the portfolio has the most exposure and to evaluate the impact of non-parallel shifts.
Question 3
Hard
Using Exhibits 1 and 2, the expected 6-month total return of Strategy 3 (barbell) minus Strategy 2 (bullet) is closest to:
Solution
B is correct. Solve the barbell weights: .
Bullet (5Y) 6-mo return: carry + rolldown − duration impact .
Barbell legs:
- 2Y: .
- 30Y: .
- Weighted barbell: .
Difference: bps for the barbell. The bullet holds a carry+rolldown advantage (≈ +24 bps), but the bear flattening punishes the belly — the 5-year takes a bps price hit versus the barbell's weighted 65 bps hit — and the ~29 bp price advantage to the barbell more than offsets the bullet's carry edge.
Bullet (5Y) 6-mo return: carry + rolldown − duration impact .
Barbell legs:
- 2Y: .
- 30Y: .
- Weighted barbell: .
Difference: bps for the barbell. The bullet holds a carry+rolldown advantage (≈ +24 bps), but the bear flattening punishes the belly — the 5-year takes a bps price hit versus the barbell's weighted 65 bps hit — and the ~29 bp price advantage to the barbell more than offsets the bullet's carry edge.
