An economic slowdown is expected to result in a 25 bp decline in Australian yield levels. Which portfolio alternative will experience the largest gain under this scenario?

A. Bullet portfolio

B. Barbell portfolio

C. Equally weighted portfolio

A Sydney-based fixed-income portfolio manager is considering the following Commonwealth of Australia government bonds traded on the ASX (Australian Stock Exchange):

The manager is considering portfolio strategies based upon various interest rate scenarios over the next 12 months. She is considering three long-only government bond portfolio alternatives, as follows:

Bullet: Invest solely in 4.5-year government bonds

Barbell: Invest equally in 2-year and 9-year government bonds

Equal weights: Invest equally in 2-year, 4.5-year, and 9-year bonds

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Tenor 2y 4.5y 9y Coupon 5.75% 3.25% 2.50% Yield 0.28% 0.55% 1.10% Price 110.90 111.98 111.97 Modified Duration 1.922 4.241 8.175 Convexity 4.9 22.1 85.2