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 estimated 12-month price return of Portfolio A relative to Portfolio B is best described as:
Solution
B is correct. The estimated price return is
with forecast changes of at 2 years, at 5 years, at 10 years and at 30 years.
Portfolio A: .
Portfolio B: .
Portfolio A therefore loses , or 21 bps, less than Portfolio B. Equal effective durations of 6.00 make the two structures indistinguishable under a parallel shift; the difference comes entirely from where each holds its key rate exposure. Portfolio B's 2.40 of key rate duration sits at the point with the largest forecast yield rise, and the earned on its 30-year leg is not enough to offset that.
with forecast changes of at 2 years, at 5 years, at 10 years and at 30 years.
Portfolio A: .
Portfolio B: .
Portfolio A therefore loses , or 21 bps, less than Portfolio B. Equal effective durations of 6.00 make the two structures indistinguishable under a parallel shift; the difference comes entirely from where each holds its key rate exposure. Portfolio B's 2.40 of key rate duration sits at the point with the largest forecast yield rise, and the earned on its 30-year leg is not enough to offset that.
