I apologize up front if this is not the appropriate forum to post this question. If I wanted to maintain a bond portfolio that had an approximate constant 5 year duration I assume that I could start an opening position by buying bonds with about 5 years left to maturity. When a new year rolls around I now have bonds that has 4 years to maturity. I could sell them and purchase 5 year to maturity bonds and start over. But I wonder If I purchase a bond with 6 years to maturity that will give me an average maturity of 5 years. Will this roughly approximate the price sensitivity If I just had all 5 years to maturity bonds? In another words 1 bond with 4 years to maturity and 1 bond with 6 years to maturity does it roughly act like 1 bond with a 5 years to maturity? Assuming this is correct could each year I just add longer maturity dates and use a weighted average to get me to an approximate 5 year duration? I don't need this to be mathematically perfect. I just want it to be a reasonable approximation. Thanks for any suggestions.
what about plotting charts of ( 1 year + 6 years) vs ( 5 years) Then you could plot these by modifying the coefficient for (5 years)
Yep. Smart move. No need to sell the whole portfolio. Check out "barbell weighted". http://bonds.about.com/od/bondinvestingstrategies/a/What-Is-A-Barbell-Strategy.htm
This is perfect. Great find. This helped me sort this question out. Thanks for all the answers and ideas the others posted as well.
Then give me a "like", Barron pays me per post. Additionally, you may start experimenting with zero coupon bonds/strips to tweak your duration. It would just be too volatile to hold individually. One of my ideas is that if we have a yield run up like the 70's where yields go to +10% or +15%, I just put it all in zeroes/strips and retire to Micronesia...
you gotta have a lotta money for any of this to make much difference nowadays more money than I got my bond money is in cash and I'm happier than a pig in shit