PORTFOLIO MANAGEMENT & APPLICATION

BOND
PORTFOLIO MANAGEMENT
STRATEGIES

FIN 661 Chapter 9 1

Alternative Bond Portfolio Strategies (pg 669)

1. Passive portfolio strategies

2. Active management strategies
3. Matched-funding techniques
4. Contingent procedure (structured active
management)

FIN 661 Chapter 9 2

 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
of holding these bonds to maturity
◼ Indexing
◼ The objective is to construct a portfolio of bonds that
will equal the performance of a specified bond index

FIN 661 Chapter 9 3

 Active Management Strategies
◼ Interest-rate anticipation
◼ Risky strategy relying on uncertain forecasts

◼ Ladder strategy staggers maturities

◼ Barbell strategy splits funds between short duration 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 to
determine expected changes in its default risk

FIN 661 Chapter 9 4

 Active Management Strategies
◼ 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

FIN 661 Chapter 9 5

 Bond Swaps

◼ Pure Yield Pickup Swap

◼ Substitution Swap
◼ Tax Swap
◼ Swap strategies and market-efficiency
◼ Bond swaps by their nature suggest market
inefficiency

FIN 661 Chapter 9 6

 A Global Fixed-Income
Investment Strategy

Factors to consider
◼ The local economy in each country including the
effects of domestic and international demand
◼ The impact of total demand and domestic
monetary policy on inflation and interest rates
◼ The effect of the economy, inflation, and interest
rates on the exchange rates among countries

FIN 661 Chapter 9 7

 Immunization Strategies
◼ Components of Interest Rate Risk
◼ Price Risk
◼ Coupon Reinvestment Risk

FIN 661 Chapter 9 8

 Classical Immunization
◼ Immunization is neither a simple nor a passive
strategy
◼ An immunized portfolio requires frequent
rebalancing because the modified duration of the
portfolio always should be equal to the remaining
time horizon (except in the case of the zero-
coupon bond)

FIN 661 Chapter 9 9