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Chapter 10 MANAGING BOND PORTFOLIOS• What has happened to the volatility
of bond prices?
• How does the term structure of interest rates affect bond investors?
• What are some active bond management strategies?
• How can bond portfolios be managed passively?
• What are interest rate swaps?
Brief history of bond market volatility
• Comparing stock and bond market volatility
• Impact of bond market volatility on investors
Figure 10.1 – Range of Long-Term Treasury Bonds’ Annual Yields, 1948-2002
Figure 10.2 – Monthly Returns on Long-Term Treasury Bonds
Figure 10.3 – Bond Market and Stock Market Volatility, 1926-2002
Analyzing the yield curve
• What is the yield curve?
• Implied forward rates
–Locking in future returns
• Theories of the yield curve
• Pure expectations theory
• Liquidity preference theory
Figure 10.4 – U.S. Treasury Securities Yield Curve
Analyzing the yield curve – Cont.• Market segmentation theory
• Empirical evidence of yield curve relationships
• Evidence of market segmentation
• Actively managing bond portfoliosInterest rate expectations
strategies
Analyzing the yield curve – Cont.• Riding the yield curve (horizon
analysis)
– Yield curve strategies
– Optimal yield curve strategies
• Yield spread strategies
• Pure yield pick up swap
• Tax swaps
• Foreign exchange strategies
Figure 10.5 – Slope of the Treasury Yield Curve: June 2000-August 2002
Figure 10.6 – Types of Yield Curve Shifts
Bond Management
• Individual bond selection strategies
• Guilt by association
• Passive bond managementIndexing bond portfolios
• Choosing an index
• Indexing methodologies
Bond Management- Cont.• Tracking error
• Immunization– Target date immunization
• Cash flow matching and multiperiod immunization
• Net worth immunization
• Interest rate swaps
• What is an interest rate swap
– Purpose of interest rate swaps
– Example of an interest rate swap