FRM一级易错题精选:A portfolio manager needs

A portfolio manager needs to hedge a USD 115 million liability. The portfolio manager is deciding between investing only in the 3%-coupon Treasury bond in the table below, or in a portfolio consisting of the shorter

maturity 2%-coupon Treasury bond and the longer maturity 4.5%-coupon Treasury bonds.
Coupo n  
Maturity
Price  
Yield
Duratio n  
Convexity
 
2.00%
6/31/2018  
102
2.03%  
4.5
 
35
 
3.00%
6/15/2023  
101
3.29%  
6
 
60
4.50% 6/14/2043  
103
4.80%  
14
40
 
The convexity of the barbell portfolio that will match the duration and price of the bullet position will be closest to:

 
A. 60
 
B. 74
 
C. 83
 
D.93
 Answer: D

The barbell portfolio and the bullet portfolio may have the same duration but different convexity.