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

Question

Quizplus · Accepted Answer

An IO (Interest Only) strip is a negative duration asset that can be valuable as a portfolio-hedging device for an FI manager when included with regular bonds whose price-yield curves show the normal inverse relationship. IO strips increase in value when interest rates rise, causing a decrease in the value of regular bonds. This makes them useful for hedging against interest rate risk in a bond portfolio. PO strips (A) are also negative duration assets, but they decrease in value when interest rates rise, making them unsuitable for hedging against interest rate risk. Class B bonds (C) and Class Z bonds (D) do not have a negative duration and are not useful for hedging against interest rate risk.

Which of the Following Is an Example of a Negative