Finance Chapter 13 Overview Bond Portfolio Management Performance Style And Strategy Exhibits The Investment Style

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CHAPTER 13

BOND ANALYSIS AND PORTFOLIO MANAGEMENT STRATEGIES

13.1 Bond Analysis Tools

13.1.1 Implied Forward Rates

13.1.2 Bond Duration

1. Calculating Bond Duration (Exhibits 13.1, 13.2)

2. Measuring Bond Price Volatility

▪ A useful property of the duration statistic comes from its interpretation as the bond’s

3. Duration of a Portfolio

13.1.3 Bond Convexity (Exhibits 13.4, 13.5)

▪ The price-yield relationship is not a straight line but a curvilinear relationship (i.e.,

convex).

13.1.4 Bonds with Embedded Options (Exhibit 13.6)

▪ A noncallable bond is said to have positive convexity because as yields decline, the

13.1.5 Yield Spread Analysis

1. Static Yield Spreads (Exhibit 13.7)

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in part.

▪ Static spread (also called the zero-volatility spread) is the number that will make the

present value of the cash flows from the corporate bond, when discounted at the

Treasury spot rate plus this static spread, equal to the corporate bond’s market price.

2. Option-Adjusted Spread

13.2 An Overview of Bond Portfolio Management: Performance, Style, and Strategy

(Exhibits 13.8, 13.9, 13.10)

▪ The investment style of a bond portfolio can be summarized by its two most

13.3 Passive Management Strategies

13.3.1 Buy-and-Hold Strategy

▪ A manager selects a portfolio of bonds based on the objectives and constraints of the

13.3.2 Indexing Strategy

▪ When designing a bond portfolio to mimic a hypothetical index, managers can follow two

13.3.3 Bond Indexing in Practice: An Example (Exhibit 13.11)

13.4 Active Management Strategies (Exhibit 13.12)

13.4.2 Credit Analysis

1. Credit Analysis of High-Yield (Junk) Bonds (Exhibits 13.14, 13.15)

▪ Investing in Defaulted Debt

2. Credit Analysis Models (Exhibit 13.16)

in part.

▪ The Z-score model combines traditional financial measures with a multivariate technique

known as multiple discriminant analysis to derive a set of weights for the specified

variables.

13.4.3 Implementing an Active Bond Transaction (Exhibit 13.17)

13.4.4 Active Global Bond Investing: An Example (Exhibit 13.18)

13.5 Core-Plus Portfolio Management Strategies (Exhibit 13.19)

▪ Core-plus bond portfolio management places a significant part of the available funds in a

13.6 Matched-Funding Management Strategies

13.6.1 Dedicated Portfolios (Exhibit 13.20)

▪ Pure cash-matched dedicated portfolio is the most conservative strategy.

13.6.2 Immunization Strategies

1. Components of Interest Rate Risk

2. Classical Immunization and Interest Rate Risk

3. The Mechanics of Bond Immunization: A Simple Illustration

▪ Given that bond risk caused by changing interest rates can be split into price risk and

4. Application of Classical Immunization (Exhibit 13.21)

− Immunization is neither a simple nor a passive strategy.

13.6.3 Horizon matching (Exhibit 13.22)

13.7 Contingent and Structured Management Strategies (Exhibits 13.23, 13.24, 13.25)

▪ Contingent procedures for managing bond portfolios are a form of what has come to be called

structured active management.

▪ The contingent immunization strategy allows the bond manager flexibility to actively manage the