Question
bond portfolio manager recently determined that the duration of her portfolio equals 7. She is concerned about a potential increase in interest rates and is
bond portfolio manager recently determined that the duration of her portfolio equals 7. She is concerned about a potential increase in interest rates and is evaluating the potential merits of reducing the duration of her portfolio. Conduct a what-if analysis that quantifies the implications on her portfolio of a potential 50 basis point increase in market yields, assuming that the current yield is 5%. Quantify the benefit that would be associated with reducing her portfolio duration from 7 to 5 today, should this rate change materialize. Discuss potential costs associated with reducing her portfolio duration.
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