2 MULTIPLE CHOICE QUESTIONS

Below are two portfolios with a market value of $500 million. The bonds in both portfolios are trading at par value.

Portfolio 1:

Issue	YTM	Par
A	2.0	$120
B	2.5	$130
C	20.0	$150
D	20.5	$100

Portfolio 2:

Issue	YTM	Par
E	9.7	$200
F	10.0	$230
G	10.2	$70

1) The dollar duration of the two portfolios is the same. Which one of the following statements is correct?

A) Portfolio 1 is a bullet portfolio because it has a diversified maturity

B) Portfolio 1 is a barbell portfolio because it has more long-term bonds than short-term

C) Portfolio 2 is a barbell portfolio because the maturities of the bonds in the portfolio are highly concentrated at one point on the yield curve

D) Portfolio 2 is a bullet portfolio because the maturities of the bonds in the porfolio are highly concentrated at one point on the yield curve

2) Assume both portfolios have the same dollar duration. If the interest rates increase by 100bp across all points on the yield curve, will both portfolios perform the same?

A) No, their values will decrease by the same magnitude, in percent

B) No, their values will change by the same magnitude because they may not have the same convexity

C) No, the portfolio with a higher convexity will go up in value by more than a portfolio with a lower convexity

D) Yes, their values will increase by the same magnitude, in percent