Вы находитесь на странице: 1из 23

Lecture Presentation Software

to accompany

Investment Analysis and

Portfolio Management
Eighth Edition

Frank K. Reilly & Keith C. Brown

Chapter 19

Chapter 19 - Bond
Portfolio Management Strategies
Questions to be answered:
What are the four major bond portfolio
management strategies?
What are the two passive portfolio
management strategies available?

Chapter 19 - Bond
Portfolio Management Strategies
What are the five active bond portfolio
management strategies available?
What is meant by care-plus bond
management and what are some plus
What is meant by matched-funding
techniques, and what are the four specific
strategies available in this category?

Chapter 19 - Bond
Portfolio Management Strategies
What are the major contingent procedure
strategies that are also referred to as
structured active management strategies?
What are the implications of capital market
theory for those involved in bond portfolio

Chapter 19 - Bond
Portfolio Management Strategies
What is the evidence on the efficient market
hypothesis as it relates to bond markets?
What are the implications of efficient
market studies for bond portfolio managers?

Alternative Bond Portfolio Strategies

1. Passive portfolio strategies
2. Active management strategies
3. Core-plus management strategy
3. Matched-funding techniques
4. Contingent procedure (structured active

Passive Portfolio Strategies

Buy and hold
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

The objective is to construct a portfolio of
bonds that will equal the performance of a
specified bond index

Active Management Strategies

Interest-rate anticipation
Risky strategy relying on uncertain forecasts
Ladder strategy staggers maturities
Barbell strategy splits funds between short
duration and long duration securities

Valuation analysis
The portfolio manager attempts to select bonds
based on their intrinsic value

Credit analysis
Involves detailed analysis of the bond issuer to
determine expected changes in its default risk

Active Management Strategies

High-Yield Bond Research
Several investment houses such as Merrill Lynch, First
Boston, Lehman Brothers, etc., have developed
specialized high-yield groups that examine high-yield
bond issues and monitor high-yield bond spreads

Yield spread analysis

Assumes normal relationships exist between the yields
for bonds in alternative sectors

Bond swaps
Involve liquidating a current position and simultaneously
buying a different issue in its place with similar attributes
but having a chance for improved return

Bond Swaps
Pure Yield Pickup Swap
Substitution Swap
Tax Swap

Swap strategies and market-efficiency

Bond swaps by their nature suggest
market inefficiency

A Global Fixed-Income
Investment Strategy
Factors to consider
The local economy in each country including
the effects of domestic and international
The impact of total demand and domestic
monetary policy on inflation and interest
The effect of the economy, inflation, and
interest rates on the exchange rates among

Core-Plus Bond Portfolio

This involves having a significant (core) part of
the portfolio managed passively in a widely
recognized sector such as the U.S. Aggregate
Sector or the U.S. Government/Corporate sector.
The rest of the portfolio would be managed
actively in one or several additional plus sectors,
where it is felt that there is a higher probability of
achieving positive abnormal rates of return
because of potential inefficiencies

Matched-Funding Techniques
Dedicated Portfolios
Dedication refers to bond portfolio
management techniques that are used to
service a prescribed set of liabilities
Pure CashMatched Dedicated Portfolios
Most conservative strategy
Dedication With Reinvestment
Cash flows do not have to exactly match
the liability stream

Matched-Funding Techniques
Immunization Strategies
A portfolio manager (after client consultation)
may decide that the optimal strategy is to
immunize the portfolio from interest rate
The immunization techniques attempt to derive
a specified rate of return during a given
investment horizon regardless of what happens
to market interest rates

Immunization Strategies
The process intended to eliminate interest
rate risk is referred to as interest rate risk
Components of Interest Rate Risk
Price Risk
Coupon Reinvestment Risk

Classical Immunization
Immunization is neither a simple nor a
passive strategy
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)

Classical Immunization
Duration characteristics
Duration declines more slowly than term to
maturity, assuming no change in market interest
Duration changes with a change in market interest
There is not always a parallel shift of the yield
Bonds with a specific duration may not be
available at an acceptable price

Matched-Funding Techniques
Horizon matching
Combination of cash-matching dedication and
Important decision is the length of the horizon

Contingent Procedures
A form of structured active management
Constrains the manager if unsuccessful

Contingent immunization
duration of portfolio must be maintained at the
horizon value
cushion spread is potential return below current
safety margin
trigger point

Implications of Capital Market Theory

and the EMH on Bond Portfolio
Bonds and Total Portfolio Theory
Bonds and Capital Market Theory
Bond Price Behavior in a CAPM
Bond-Market Efficiency

The Internet
Investments Online

End of Chapter 19
Bond Portfolio Management

Future topics
Chapter 20
An Introduction to Derivative Markets and