im-11-4e - CHAPTER ELEVEN MANAGING FIXED-INCOME INVESTMENTS...

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CHAPTER ELEVEN MANAGING FIXED-INCOME INVESTMENTS CHAPTER OVERVIEW This chapter discusses active and passive bond portfolio management strategies. The concept and use of duration are explained, as are the various types of portfolio immunization strategies utilizing duration. In addition, various active strategies, or bond swaps, are described. LEARNING OBJECTIVES After studying this chapter, the student should have a thorough understanding of duration, be able to calculate duration of various bond portfolios, and to construct immunized portfolios appropriate for different investor categories. The student should also understand active bond portfolio management, from the concept of interest rate predictions and various possible market anomalies. PRESENTATION OF CHAPTER MATERIAL 1. Basic Strategies The basic decision involved in fixed-income management is the decision to be active or passive. An active strategy has as its goal to secure superior returns from the fixed-income portfolio. Superior returns can be earned if the investor can predict interest rate movements that are not currently incorporated into price or if the investor can identify bonds that are mispriced for other factors. For example, finding a bond that has a credit risk premium that is too large for its credit risk. Passive management involves controlling risk and balancing risk and return. T 11-2 Managing Fixed Income Securities: Basic Strategies 2. Traditional Bond Pricing Relationships The traditional bond pricing relationships are displayed in T 11-3 and T 11-4. The relationships with respect to maturity are not exact as they are when duration is used. In discussing the pricing relationships
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im-11-4e - CHAPTER ELEVEN MANAGING FIXED-INCOME INVESTMENTS...

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