An investor with a liability due in eight years’ time wants to purchase bonds to...

A barbell strategy combines bonds at the short and long ends of the maturity or duration spectrum rather than concentrating holdings around the target date. The aim is to achieve an overall portfolio duration that matches the liability horizon while benefiting from diversification across different parts of the yield curve. Here the liability is due in eight years, so the portfolio’s overall duration should initially be close to eight. Option C mixes 6-year and 10-year duration bonds. If held in equal proportions, the weighted average duration is 8 years, aligning the portfolio’s interest rate sensitivity to the timing of the liability. This is consistent with liability-focused fixed income management: matching duration reduces the risk that changes in interest rates will cause the portfolio value to move in a way that jeopardises meeting the liability. Options A and D are not barbell constructions because they concentrate at, or close to, the target duration rather than splitting exposure between shorter and longer durations. Option B is too long in duration and would create a mismatch, increasing sensitivity to interest rate movements relative to an eight-year liability.