Frank Meyers, CFA, is a fixed-income portfolio manager for a large pension fund. A member of the Investment Committee, Fred Spice, is very interested in learning about the management of fixed-income portfolios. Spice has approached Meyers with several questions.

Meyers decides to illustrate fixed-income trading strategies to Spice using a fixed-rate bond and note. Both the bond and note have semiannual coupon periods. Unless otherwise stated, all interest rate changes are parallel. The characteristics of these securities are shown in the following table. He also considers a 9-year floating-rate bond (floater) that pays a floating rate semiannually and is currently yielding 5%.

eXcel Please visit us at www.mhhe.com/Bodie13e eXcel Please visit us at www.mhhe.com/Bodie13e Characteristics of Fixed-Rate Bond and Fixed-Rate Note Fixed-Rate Bond Fixed-Rate Note Price 107.18 100.00 Yield to maturity 5.00% 5.00%

Time to maturity (years) 9 4 Modified duration (years) 6.9848 3.5851 Spice asks Meyers about how a fixed-income manager would position his portfolio to capitalize on expectations of increasing interest rates. Which of the following would be the most appropriate strategy?

a. Shorten his portfolio duration.

b. Buy fixed-rate bonds.

c. Lengthen his portfolio duration. P-963