Case1 Inflation protected bonds.docx

Case1 Inflation protected bonds.docx - Subject Memorandum...

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Subject: Memorandum for Case “The Harvard Management Company and Inflation-Protected Bonds” The Harvard Management Company (HMC) is a separately incorporated, non-profit entity, owned by Harvard University. It provides Harvard University internal management to achieve its investment goals. Its investment strategy has produced a real return of 11.3% in the past ten years. From late Febuary 2000, the president and CEO of HMC has been trying to change Harvard Policy Portfolio by adding Treasury Inflation-Protected Securities (TIPS). Policy Portfolio determines the long-run allocation of endowment to different asset classes, and it also serves as a benchmark of evaluation of investment strategies. Before adding TIPS to portfolio, HMC has 11 wide assets classes in the policy portfolio, designed to achieve growth goal of 4% to 5% annually in endowment. Now TIPS accounts for 7% of the total portfolio. TIPS’s structure requires the principal and coupon to change with inflation which is determined by Consumer Price Index. Like nominal Treasury notes and bonds, TIPS pay semi-annual coupons at a fixed coupon rate. However, TIPS’ principal is not fixed over the life of the bond. The Inflation-adjusted principal value at time t equals to the product of stated value at issuance times index ratio. And index ratio equals to CPI at time t divided
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