Which of the following is an example of a negative duration asset that is valuable as a portfolio-hedging device for an FI manager when included with regular bonds whose price-yield curves show the normal inverse relationship.
A)PO strip.
B)IO strip.
C)Class B bonds
D)Class Z bonds
E)Class A bonds

Question

Quizplus · Accepted Answer

An IO (Interest Only) strip is a negative duration asset that can act as a portfolio-hedging device for an FI manager when included with regular bonds whose price-yield curves show the normal inverse relationship. This is because the value of an IO strip increases when interest rates increase, thus offsetting potential losses in value of regular bonds. The other options listed (PO strips, Class B bonds, Class Z bonds, and Class A bonds) are not negative duration assets and do not act as effective hedging devices for an FI manager.

Which of the Following Is an Example of a Negative