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    9 views4 pages

    Chapter 16 - FIN 615 - Notes

    Uploaded by

    yang Alfred

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    of 4
    Chapter Sixteen: Managing Bond Portfolios 1. Passive investment strategy vs. active investment strat ILA passive investment strategy takes market prices of sccurties as fury set, Rater than attempting to beat the market by exploiting superior info or insight, passive managers act to maintain an appropriate rsk-retun balance given market opportunities. One special case i en immunization “strategy that attempt insulate or nmnize the portfolio fom iteret ate isk: 2. In contrast, an active investment strategy attempts to achieve returns greater than those ‘commensurate with the risk bore, Active managers use either intrest rate forecasts to predict ‘movements in the entite bond market or some form of intramarket analysis to identity parieular sectors ofthe market or particular bonds that are relatively mispriced, Hi Interest rate risk 1. Motivation for an intoret rato risk measure: 1. An investor would like to estimate the changes in price due to anticipated changes in intrest ites. », An investor may want to hedge the risk involved in holding fixed income instrument. «. An investor may want to construct a portfolio of bonds whic tracks an index in terms of risk. 41 For comparing different bonds using a common rsk measure 2. Time to maturity: 2 Ignores coupon payments and does not account for diferent cashflow sizes. b. Azero coupon and a coupon bond with same maturity do not have same interest rate sk. This can be seen from the shapes of yield eure ofthese bonds. 3. Duration: to measure how much bond prices will change if yields change. Duration can help us in ‘constructing proper hedges, calculating estimated price changes: ‘%AP (Estimated) = DMac * AC 14), et, {Maca aan | x leap TFs nae 2 “ene (co + Interpretation 1: Macaulay's duration is re 48 the weighted average of the times to each coupon or principal payment made by the bond. ‘The weight i just the present value of the payment divided by the bond price. « Interpretation 2: Macaulay's duration isthe fulerum point of seesaw with the weightson the seesaw being present value of cashflows, i the point in time at which the present value of reinvested cash flows are exactly equal to the present value of the emeining future cash flows. (challenge youtselE prove i. 5, Caleulation of Macaulay's duration 4: the sia, the share of pero eas lows in curent valve ce w, &Ha+yy* use these weights to calculate the Wetghied erage ofthe times until the receipt ofeach ofthe bond's payment, we obtain Macaulay's duration D= So exw, eh 6, Appin of draton 2 To cals estimated pce changes: my ap dD (119) = -)¥} ——— po Uta) . unser ell, 1, A lesinild)- Dy 4(t4) Pv My), AL =-Dyay — 7 Propet of Mashaays Drab (emember cea”) [Rute 1: Duration of a zero-coupon bond is its maturity ‘Rate 2: Holding maturity constant, duration varies inversely with coupon size Bigger coupons bring higher share of near-term cash lows in current price Rule 3: Holding coupon rate constant generally inereases with its maturity. Duration always increases with maturity for bonds selling at par oF at a premium to par. ‘Rate 4: Duration varies inversely with yieKd-to-maturity Larger YTM brings lower share of longeterm cash flows in current price, Rule 5: The duration of a level perpetuity is = (I+y)/y (note: the maturity is infinite here!) ‘Rute 6: the duration of a coupon bond ) Danton Gop bed = (e+ efaraye 1Itg he eis the coupon rate per pamer’ pero, ihe numba of payment pera (myn eq Wty, abo prs coapomere an oe jer) and) 8 the om sel por me pero Tt Convexty [HEstnates 4 6DP osing uraion alone can be subtly wrong ‘here apatterohe macuresy Adu SP = Eatin 2D? When elses pie declines esha ested by ua Won ils price tines more thesia y ton pate eat vented" et SDP sconex ined Extn 90DP is ea ld + Comigerves i propery cFeecond devas: Duration property of it eaves, de ~ Converity = ae uc mln tsar i4 a AES (~ Dry JAY + SO ay 3. Convexity is generally considered a desirable trait for investors. Bonds with greater curvature gin ‘ote in price when yields fall than they lose when yields rise 2 IV. Passive bond management 1. Two types of passive management. One is an indexing strategy that attempts to replicate the Terfornance ofa given bond index. The other is immunization techniques. These two ar vty Eileen in cms of sk exposure. A bond-index polio wl have te same riserevard profile tthe fond matt nxt hich i ted. Immenizationsrtgis sek o ets «vray Zeros poi, n which terest te movements have no impact onthe vale of he i 2. Bon inet fun te major inden of the brow bond marke ue the Salomon Sit Barey ‘Broad Investment Grade (BIG) inde, the Lehman Aggregate Bond Indes, andthe Mel Lynch Domestic Mase inden. All hee are markct-value‘eighied indexes of al returns. All thee include goverment, corporat, mortgage-backed, and Yorke, bonds. (hose ar dol

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