标题: Interest rate exposure in a recovery [打印本页] 作者: DarienHacker 时间: 2011-7-11 19:18 标题: Interest rate exposure in a recovery
Schweser Qbank Q:
If a cash manager thought the economy was going to have a robust recovery, (s)he would:
A) shift from shorter-term cash instruments to longer-term cash instruments and from more credit worthy instruments to less credit worthy instruments.
B) shift from longer-term cash instruments to shorter-term cash instruments and from less credit worthy instruments to more credit worthy instruments.
C) shift from longer-term cash instruments to shorter-term cash instruments and from more credit worthy instruments to less credit worthy instruments.
Your answer: A was incorrect. The correct answer was C) shift from longer-term cash instruments to shorter-term cash instruments and from more credit worthy instruments to less credit worthy instruments.
Interest rates will increase during a robust expansion. If a manager thought that interest rates were set to rise, (s)he would shift from say nine-month cash instruments down to three-month cash instruments. If (s)he thought that the economy was going to improve so that less creditworthy instruments would have less chance of default, (s)he would shift more assets into lower rated cash instruments. Longer maturity and less creditworthy instruments have higher expected return, but also more risk.
My question is, I think I mistakenly thought they wanted exposure to rising rates, but instead, I should probably think they don't want exposure due to falling bond prices....hence the shorter terms
So the logic is that exposure to interest rates increases with term (duration) Right?
So if you WANTED exposure to the rising rates one would have purchased longer bonds right?
Second the reason we want lower credit issues is that we expect spreads to decrease due to the company financials improving, correct?作者: Zestt 时间: 2011-7-11 19:18
Rates are increasing, holding longer term securities would hurt your return. While you're holding that 10 year 4% corporate bond, other managers are rolling over their 3% 2 year bonds at higher and higher rates.
Rates up = lower duration
Rates down = increase duration
If economy is recovering, chances of default are less. Invest in lower rated securities and pocket the extra yield before they get upgraded.
