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BOND MATH: The Theory Behind the Formulas by Donald J. Smith

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Acting on a Rate View

Suppose that you are the strategist for an aggressively (and actively) managed “long-only” portfolio of Treasury notes and bonds, having maturities spread out along the yield curve. You have to stay fully invested in Treasuries, cannot use derivatives, cannot take on short positions, and cannot use borrowed funds for leverage. You are authorized to buy and sell securities opportunistically in light of your view on an impending change to the level and shape of the Treasury yield curve. Your objective is to maximize quarterly returns, that is, achieve gains (when Treasury yields go down) as well as to minimize losses (when yields go up). Currently, the market-value-weighted average modified duration of your portfolio is 7.10 ...

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