5.5.BKM Ch 16 (Managing Bond PF)

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5.5.BKM Ch 16 (Managing Bond PF)
2011-02-19 14:48:45

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  1. Passive bond investment strategies
    • Overview: do not attempt to identify under/overpriced bonds; assumes prices are fairly set
    • Indexing: mirror overall results of the broad mkt (hard because mkt chgs frequently)
    • Immunization: attempt to eliminate interest rate risk from FP by either immunizing the net worth or the holding period. In both cases it requires rebalancing the PF
    • CF matching: it does eliminate risk, but is severly limits PF choices (could even be possible that no asset match the required duration)
  2. Active bond management
    • Overview: attempt to improve returns either by (a) forecasting future rates or (b) identifying mispriced bonds using bond swaps
    • Substitution: replace a bond w/ nearly identical substitute w/ a lower price (b)
    • Intermarket spread: in anticipation of chgs in spread btwn diff sectors of bond mkt (b)
    • Rate anticipation: in anticipation of chg in rate that might affect some bonds more than others (a)
    • Pure yield pickup swap: replace low yielding bonds w/ higher yield bonds (a)
    • Tax swap: try to achieve some tax benefit
  3. Bond Contingent Immunization
    Actively manage PF as long as value doesn't dip to or below a pre-defined trigger. At that point, active mgmt ceases and the PF is immunized.
  4. 3 reasons why basic bond immunization is irrealistic
    • It assumes that interest rate only chg by small amt
    • It assumes parallel shifts in term structure
    • It ignores inflation