pp20-bond portfolio management[v1]
TRANSCRIPT
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Lecture Presentation Softwareto accompany
Investment Analys is andPort fo l io Management
Seventh Edition
byFrank K. Reilly & Keith C. Brown
Chapter 20
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Bond Portfolio Management
Strategies
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Alternative Bond Portfolio Strategies
1. Passive portfolio strategies
2. Active management strategies
3. Matched-funding techniques
4. Contingent procedure (structured active
management)
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(1) Passive Portfolio Strategies
Buy and hold
A manager selects a portfolio of bonds based on the
objectives and constraints of the client with the intent ofholding these bonds to maturity
Two prominent strategies under this approach are the
Laddered and Barbell strategies (see next six slides)
Indexing The objective is to construct a portfolio of bonds that
will equal the performance of a specified bond index
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Classic Passive Management Strategies
A laddered strategy distributes
fixed income dollars throughout
the yield curve.parva
lue
maturity
maturityparval
ue A barbell strategy differs from the
laddered strategy in that lessinvestment is made in the middle
maturities. A credit barbell is a bond portfolio containing
a mix of high-grade and low-grade securities.
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Classic Passive Management Strategies
Insert Figure 19-7 here.
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Classic Passive Management Strategies
Insert Figure 19-8 here.
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Classic Passive Management Strategies
Insert Figure 19-9 here.
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Classic Passive Management Strategies
Insert Figure 19-10 here.
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If durationladdered portfolio> durationbarbell portfolio,The Risk of Barbells and Ladders
Yield curve inversion means short-term rates arerising faster than long-term rates. Duration as a
pure measure of interest rate risk only works for
parallel shifts in the yield curve.
rising interest rate falling interest rate
interest rate barbell ladder
risk favored favored
reinvestment barbell ladderrate risk favored favored
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(2) Active Management Strategies
Interest-rate anticipationRisky strategy relying on uncertain forecasts
Ladder strategy staggers maturities
Barbell strategy splits funds between shortduration and long duration securities
Valuation analysis
The portfolio manager attempts to select bonds
based on their intrinsic value Credit analysis
Involves detailed analysis of the bond issuer todetermine expected changes in its default risk
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Yield spread analysis
Assumes normal relationships exist between the
yields for bonds in alternative sectors
Bond swaps
Involve liquidating a current position and
simultaneously buying a different issue in its
place with similar attributes but having a chance
for improved return
(2) Active Management Strategies
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Core-Plus Bond Portfolio
Management This involves having a significant (core) part of
the portfolio managed passively in a widely
recognized sector such as the U.S. AggregateSector or the U.S. Government/Corporate sector.
The rest of the portfolio would be managed
actively in one or several additional plus sectors,
where it is felt that there is a higher probability ofachieving positive abnormal rates of return
because of potential inefficiencies
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(3) Matched-Funding Techniques
Dedicated Portfolios
Dedication refers to bond portfoliomanagement techniques that are used toservice a prescribed set of liabilities
Pure Cash-Matched Dedicated Portfolios
Most conservative strategy
Dedication With Reinvestment Cash flows do not have to exactly match
the liability stream
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Immunization Strategies
Components of Interest Rate Risk
Price Risk
Coupon Reinvestment Risk
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Classical Immunization
Duration characteristics
Duration declines more slowly than term to
maturity, assuming no change in market interestrates
Duration changes with a change in marketinterest rates
There is not always a parallel shift of the yieldcurve
Bonds with a specific duration may not beavailable at an acceptable price
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(3) Matched-Funding Techniques
Horizon matching
Combination of cash-matching dedication and
immunizationImportant decision is the length of the horizon
period
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(4) Contingent Procedures
A form of structured active management
Constrains the manager if unsuccessful
Contingent immunizationduration of portfolio must be maintained at the
horizon value
cushion spread is potential return below current
market
safety margin
trigger point
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End of Chapter 20
Bond Portfolio ManagementStrategies