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Ryan
FIXED INCOME
PORTFOLIO
MANAGEMENT
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Secondary:
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Theorem #2: Generally, for a given coupon rate, the longer is the term to
maturity, the greater is the percentage price change for a given shift in yields. (The
maturity effect)
Implication: Long-term bonds are riskier than short-term bonds for a given shift in
yields, but also have more potential for gain if rates fall.
Theorem #3: For a given maturity, the lower is the coupon rate, the greater is the
percentage price change for a given shift in yields. (The coupon effect)
Implication: Low-coupon bonds are riskier than high-coupon bonds given the same
maturity, but also have more potential for gain if rates fall.
Theorem #4: For a given coupon rate and maturity, the price increase from a
given reduction in yield will always exceed the price decrease from an equivalent
increase in yield. (The convexity effect)
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a. Buy and Hold: This involves selecting securities with the desired
characteristics (e.g., credit quality, coupon, maturity) and then not trading
them again until they mature.
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The active approach to bond portfolio management involves altering the portfolio
so that the characteristics of the securities held provide the best chance of taking
advantage of the managers view of anticipated conditions in the macro economy or
with the specific security. Generally, the following types of views are employed in
practice:
c. Credit Analysis: This involves assessing the default risk of an issuer and
trading the bond when your perception differs from that of the market.
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While these transactions can involve anything from little risk (yield pickup
swaps) to great risk (rate anticipation swaps), they all are based on the
premise that it is possible to improve portfolio performance as a result of
changing market conditions.
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Bond Swaps
Another type of active trade is a bond
swap. This involves liquidating a current
position and simultaneously buying a
different issue in its place with similar
attributes, but a chance of improved
returns.
Notable examples of bond swaps include:
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Contingent management procedures are hybrid strategies that attempt to marry the
best practices from both passive and active strategies with the risk control
mechanisms implied by dedicated strategies.
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d.
Derivative-Linked Investing:
agreements, or optionsare used to transform the cash flows and/or risk profile of a
plain vanilla bond offering it something other than the original structure. Although
derivatives represent a cost-effective way of implement this sort of financial reengineering, the point using derivatives in the fixed-income portfolio is usually to
create something synthetically that: (i) the manager cannot do directly, or (ii) does not
exist otherwise.
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