Re balancing an Immunized Portfolio !!!

CFA Level III Fixed Income
#1

In FinQuiz it says “When market yields decreases, there’s a need to invest more in short term bonds because duration is higher at lower yields”

May someone clarify !!!

i see that when yields are low, the investor gets its repayment more slowly, so the duration is lower, but why investing in short term bonds ?!

#2

Market yield decreases => Bond Prices increase -> so you maximise the effect by investing more.

-1 * Rate Change (which is negative) * Duration of Bond = change in Price - which will now be positive.

there is a difference between what you are saying - yields are LOW vs. what is being said - yields are lower than before …

#3

why is the duration longer?

In FinQuiz it says “When market yields decreases, there’s a need to invest more in short term bonds b ecause duration is higher at lower yields”

#4

For a fixed coupon bond, the Macaulay duration and modified duration increase as the YTM decreases.

For example, a 5-year, semiannual-pay, 6% coupon bond has a modified duration of:

  • 4.27 years when its YTM is 6%
  • 4.30 years when its YTM is 5%
  • 4.34 years when its YTM is 4%
  • 4.37 years when its YTM is 3%
  • 4.41 years when its YTM is 2%
  • 4.44 years when its YTM is 1%
  • 4.48 years when its YTM is 0%
#5

Thanks for quick reply.

so can it be said that it’s similar to the fact why zero coupon bonds have larger duration

lower coupon/ yield higher duration