) GIVEN VERTEX'S FORECASTS IN STATEMENT 4, THE MOST APPROPRIATE STRATEGY FOR VERTEX IS TO

6.) Given Vertex's forecasts in Statement 4, the most appropriate strategy for Vertex is to:

A.

shorten duration in the credit sector and lengthen duration in the Treasury sector.

B.

lengthen duration in the credit sector and shorten duration in the Treasury sector.

C.

lengthen duration in all spread sectors and the Treasury sector.

Answer = B

As spreads tighten the credit sector will benefit from increased exposure to longer

duration issues. Because the yield curve is expected to steepen, it would be appropriate

for Vertex to shorten duration in Treasuries because rising yields will cause security

prices to fall. Ideally, the net effect should be to reduce duration below the benchmark.

“Relative Value Methodologies for Global Credit Bond Portfolio Management,” by Jack

Malvey