Identifier: C2T4L4 | Revision: 2026-10-26

Decision and objectives

A portfolio with the right average duration can still fail to pay a dated liability. Compare ladder, bullet, barbell and cash-flow matching as methods of arranging payments rather than as return promises. The investor must decide which dates are fixed, which cash can be reinvested and which securities may need to be sold.

Objectives: Compare allocation timing structures; Calculate value-weighted duration; Check actual cash coverage instead of average maturity.

Prerequisites: C2T4L3.

Mechanics

A ladder spreads maturities across successive dates; maturing principal can fund spending or be reinvested. A bullet concentrates maturities around one date. A barbell allocates to short and long dates with less in the middle. These describe the portfolio's payment placement, not the shape of its yield curve.

Cash-flow matching assigns contractual receipts to liabilities by currency and date. Duration matching instead aligns local present-value sensitivity under stated assumptions. It can reduce sensitivity of asset value relative to liability value for small parallel moves, while requiring reinvestment and rebalancing. Matching duration alone does not match credit, curve twists or cash deadlines.

Price and return drivers

Portfolio modified duration = sum(market-value weight × position modified duration). Use the same currency and convention. A ladder's short end can reduce forced sales, but future reinvestment rates are unknown. A barbell may have different convexity and key-rate exposure than a bullet with the same duration. To check payment capacity, create a dated cash ledger, not just one average duration number.

Worked case

Hypothetical TRY 1,000,000 portfolio. Barbell: TRY 500,000 market value in short debt with Dmod 0.8 and TRY 500,000 in long debt with Dmod 5.2. Portfolio Dmod = 0.5×0.8 + 0.5×5.2 = 3.0. A bullet valued TRY 1,000,000 with Dmod 3.0 has the same approximate DV01: 1,000,000 × 3 × 0.0001 = TRY 300 per basis point. A parallel 40-basis-point rise gives approximate TRY 12,000 loss in each, ignoring convexity.

Separate cash-match case: liabilities are TRY 100,000 after year one and TRY 200,000 after year two. Supplied zero-coupon prices are 95 and 89 per 100. Buy nominal 100,000 of the first and 200,000 of the second. Cost = 100,000×0.95 + 200,000×0.89 = TRY 273,000. No reinvestment or secondary sale is needed if payments occur in full and settlement fits. Fees and tax are excluded from this model and require an extra cash reserve.

Adverse case

If only long-end yields rise 1 percentage point while short yields stay unchanged, the barbell's estimated loss is 500,000×5.2×0.01 = TRY 26,000. An equal-duration bullet concentrated at a different curve point need not suffer the same loss. If year-one liability unexpectedly rises to TRY 130,000 in the matching case, the year-one receipt is short TRY 30,000 even though enough nominal principal may exist at year two. Selling the later security introduces rate and spread risk.

Practical use

Choose securities with confirmed denominations, dates, coupon entitlements and executable quotes. Include settlement holidays and whether receipt is withdrawable before the payment deadline. Diversifying maturities does not diversify an issuer concentration. A debt fund can hold a diversified ladder but generally does not promise a unit holder fixed principal on a personal target date. Include investor-level costs and actual dated tax before declaring the allocation funded.

Decision boundaries

Use cash matching for known nominal liabilities when practical issues fit. Use a ladder when rolling needs and some reinvestment uncertainty are acceptable. Use duration analysis for sensitivity management while preserving a cash buffer. Decline a barbell described as equivalent to a bullet solely because one duration number matches: curve shape and liquidity can make their outcomes different.

Practice and references

Exercise: hypothetical market values TRY 300,000 at Dmod 1 and TRY 700,000 at Dmod 4. Answer: portfolio Dmod = 0.3×1 + 0.7×4 = 3.1; DV01 = TRY 310; a parallel 30-basis-point rise implies loss TRY 9,300 before convexity, costs and tax.

Takeaway: use duration for sensitivity and dated cash for spending capacity; inspect both.

Reference guide: debt-portfolio, portfolio-duration, cash-flow-matching, Ladder, Barbell, Bullet portfolio, Cash flow matching.

Next: C2T5L1. Topic test: C2T4.

Primary sources (checked 2026-10-26; changing terms require a publication recheck): SEC Investor Bulletin: What Are Corporate Bonds? — Interest rate risk, credit risk, call risk and seniority.

Shared reference guide | Class examination