Investment Term for the Day : Barbell
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Description
The barbell is an investment strategy applicable primarily to a fixed income portfolio. Following a barbell method, half the portfolio contains long-term bonds and the other half holds short-term bonds....
show moreThe barbell strategy will have a portfolio consisting of short-term bonds and long-term bonds, with no intermediate bonds. Short-term bonds are considered bonds with maturities of five years or less while long-term bonds have maturities of 10 years or more. Long-term bonds usually pay higher yields—interest rates—to compensate the investor for the risk of the long holding period.
However, all fixed-rate bonds carry interest rate risk, which occurs when market interest rates are rising in comparison to the fixed-rate security being held. As a result, a bondholder might earn a lower yield compared to the market in a rising-rate environment. Long-term bonds carry higher interest rate risk than short-term bonds. Since short-term maturity investments allow the investor to reinvest more frequently, comparably rated securities carry a lower yield with the shorter holding requirements.
Information
Author | Africa Business Radio |
Organization | Africa Business Radio |
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