CHAPTER 16
BOND PORTFOLIO MANAGEMENT STRATEGIES
I. Bond Portfolio Performance, Style, and Strategy
Fixed-income portfolios generally produced both less return and less volatility
than equity portfolios. (Exhibit 16.1)
II. Passive Management Strategies
A. Buy-and-Hold Strategy
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
III. Active Management Strategies
Characteristics of Active Bond Portfolio Strategies (Exhibit 16.5)
A. Interest Rate Anticipation
Riskiest strategy because it involves relying on uncertain forecasts of future
interest rates
D. Yield Spread Analysis
E. Implementing an Active Bond Transaction
Bond Swaps involve liquidating a current position and simultaneously buying a
F. Active Global Bond Investing: An Example
An active approach to global fixed-income management must consider three
factors:
1. The local economy in each country that includes the effect of domestic and
IV Core-Plus Portfolio Management Strategies
Core-plus bond portfolio management places a significant part of the available
V. Matched-Funding Management Strategies
A. Dedicated Portfolios
B. Immunization Strategies
1. Components of Interest Rate Risk
Price Risk
Coupon Reinvestment Risk
16 – 3
b. 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)
C. Horizon matching (Exhibit 16.10)
Combination of cash-matching dedication and immunization
Important decision is the length of the horizon period
VI. Contingent and Structured Management Strategies
The contingent immunization strategy encompasses the opportunity for bond