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CFA Level I · CFA Level I Exam · Yield-Based Bond Duration Measures and Properties

A manager wants to lower the interest rate sensitivity of a bond portfolio ahead of expected rising yields. The action most likely to achieve this is to:

The manager should shift holdings toward bonds with shorter durations. Portfolio duration is a weighted average of component durations, so a larger weight in low-duration bonds lowers sensitivity to rising yields. Long-maturity, low-coupon and zero-coupon bonds have high durations and would increase the portfolio's loss.

  1. Asell short-maturity bonds and buy long-maturity low-coupon bonds
  2. Bshift holdings toward bonds with shorter durationsCorrect
  3. Cincrease the weight of zero-coupon bonds with long maturities

Explanation

Portfolio duration is a weighted average, so raising the weight of low-duration bonds lowers it and reduces the loss when yields rise. The other two actions add long, low-coupon or zero-coupon exposure, which have high durations and raise sensitivity.

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