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Bond portfolio management

Jamal Munshi, Sonoma State Univesity, 1992
All rights reserved

PASSIVE STRATEGIES
  • objective: minimize risk of meeting future funding needs
  • methods
    • define universe of securities
    • define sources of cash flow uncertainties
    • design portfolio to generate funding cash flows
  • strategies
    • dedication
    • immunization
    • horizon matching
    • contingent immunization
    • indexation
    • portfolio insurance and floors
    • use of derivatives
      • hedge to reduce risk
      • swaps, options, forwards, futures
ACTIVE STRATEGIES
  • objective:
    • re-evaluate/forecast/anticipate
    • profit from this information
    • high risk high return
  • forecasts:
    • credit risk pricing
    • credit risk vs maturity
    • anticipated rating change
    • parallel shifts in the yield curve
    • slope changes in the yield curve
    • junk bonds
    • options and futures
    • credit and credit spread derivatives
  • strategy: maximize returns from a given anticipated change in price by minimizing investment needed to realize the dollar gains
  • leveraging with derivative contracts
UNIVERSE OF SECURITIES
  • treasuries
  • corporate: credit risk
  • agency: prepayment risk
  • muni: tax free
  • junk (high yield)