Bus 315 - Week7

Bus 315 - Week7 - Week 7 Fixed Income Securities III:...

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Week 7 Fixed Income Securities III: Managing Bond Portfolios - Bodie et al., Ch. 15 1 Jorge Cruz Lopez - Bus 315: Investments
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Managing Bond Portfolios Objective: To examine different strategies available to bond portfolio managers. 2 Jorge Cruz Lopez - Bus 315: Investments
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Managing Bond Portfolios 1. Interest Rate Risk 2. Convexity 3. Passive Management 4. Active Management 5. Callable Bonds and MBSs 3 Jorge Cruz Lopez - Bus 315: Investments
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1. Interest Rate Risk 4 Jorge Cruz Lopez - Bus 315: Investments
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Fixed Income Securities: Basic Strategies Active strategy – Trade on interest rate predictions – Trade on market inefficiencies Passive strategy – Control risk – Balance risk and return 5 Jorge Cruz Lopez - Bus 315: Investments
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Bond Pricing Relationships • Inverse relationship between price and yield. • An increase in a bond’s yield to maturity results in a smaller price decline than the gain associated with a decrease in yield. • Long-term bonds tend to be more price sensitive than short-term bonds. 6 Jorge Cruz Lopez - Bus 315: Investments
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Interest Rate Sensitivity 7 Jorge Cruz Lopez - Bus 315: Investments
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Bond Pricing Relationships • As maturity increases, price sensitivity increases at a decreasing rate. • Price sensitivity is inversely related to a bond’s coupon rate. • Price sensitivity is inversely related to the yield to maturity at which the bond is selling. 8 Jorge Cruz Lopez - Bus 315: Investments
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Bond Pricing Relationships 9 Jorge Cruz Lopez - Bus 315: Investments
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• A measure of the effective maturity of a bond • The weighted average of the times until each payment is received, with the weights proportional to the present value of the payment • Duration is shorter than maturity for all bonds except zero coupon bonds
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Bus 315 - Week7 - Week 7 Fixed Income Securities III:...

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