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 R28 : Barbell & Bullet 
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Joined: 28 Feb 2013
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V4, P39~40
The statements concluded that in case that SHORT RATES “decline” while LONG RATES go up, the BULLET portfolio has less exposure to changes in the interest structure than the BARBELL portfolio because BARBELL portfolio is exposed to higher REINVESTMENT RISK and
REINVESTMENT RISK determines IMMUNIZATION RISK ?
In above statements,
Shall the BARBELL portfolio be exposed to not only the higher REINVESTMENT RISK but also to higher PRICE RISK (capital loss) ?
Why only the REINVESTMENT RISK is accounted for in the determination of the IMMUNIZATION RISK ? Why the PRICE RISK is not accounted for ?
On the other hand, in case that SHORT RATES “rise” while LONG RATES fall, is it that will BARBELL portfolio outperform the BULLET portfolio because reinvestment rates of BARBELL portfolio will be higher than those of the BULLET portfolio and the increases in the prices
of BARBELL will result in capital gain ? In all cases, BARBELL portfolio is riskier than BULLET portfolio ?
Any one can clarify / explain clearly ?


23 Mar 2013
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bpdulog Wrote:
——————————————————-
In a barbell portfolio, the price increase from the longer duration instruments will
produce a gain that more than offsets the loss on the short term instruments.
Yes, in case that SHORT RATES “rise” while LONG RATES “fall”, and it will outperform a bullet portfolio. So, bullet portfolio is riskier than barbell portfolio in this case, right ?
Barbell is riskier since you are exposed to twists in the yield curve in addition to shifts.
Why ? It is not necessaily so, I think.


23 Mar 2013
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janakisri / bannisja,
Thank you very much for your responses ! However, I am still confused by following issues.
Regarding the immunization risk, is it that the long maturity bonds of a barbell portfolio must be sold out before their maturity dates to meet the requirement of the liabilty ?
Let’s take a look at the Exhibit 17 on P39 (V4). In panel (A) with a barbell potfolio, the two bonds are matured at T=1 (short bond) & T=10 (long bond) respectively, and the Horizon Date is at T=5 (the date at which the liability is due).
In this case, is it that the long bond with maturity of 10 shall be sold out at T=5 to pay the liabilty ? If it shall be sold out at T=5 under the scenario (as descirbed 3rd paragraph on P39) that SHORT RATES “decline” while LONG RATES “go up”, then the long bond will realize a price fall (capital loss).
What I mean here is that the long bond barbell portfolio shall not be hold until its maturity date and it seems that the price risk (capital loss) shall be accounted for too in determining the “immunization risk” while it is said in last paragraph on P39 that “only” reinvestment risk” determines “immunization risk”. Why ?


23 Mar 2013
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i could be wrong, but i don’t think of it that at t = 5 you’d be forced to sell the t = 10 bond. it’s more so that you combine a bunch of stuff so that when all of it matures or you hold it in your portfolio, in theory you have the assets that matches the duration of your liability and would have the capacity to pay it off. so the bullet since you get payment right around when the liability is due makes it easy- great- your bonds mature, you pay your liability, easy peasy. if it’s staggered all around and your T = 1 matures, then while in theory if rates stay the same then that combined with your T = 10 jobby makes your t = 5 liability paid, what happens now if interest rates drop and you can’t reinvest your T = 1 cash at the rates you had implied to make this T = 5 work? you have the reinvestment risk then of the shorter term stuff. the t =10 just think it’s going to maturity. so if interest rates never moved or moved parallel, in theory either portfolio would do the job. it’s when you get twists, though, that the stuff that matures early may reinvest at worse off rates than you had assumed which then in light of the full portfolio to pay the liability may fall short.
i think you’re overthinking it a bit. keep it simple enough- you definitely understand the concept of it all.


23 Mar 2013
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it’s when you get twists, buffet near san jose though, that the stuff that matures early may reinvest at worse off rates than you had assumed which then in light of the full portfolio to pay the liability may fall short.
i think you’re overthinking it a bit. keep it simple enough- you definitely understand the concept of it all.


28 May 2018
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29 May 2018
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