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Unformatted text preview: investment horizon; when do you need the cash? 2. Involves periodic adjustment in portfolio composition; see #3 below 3. Increase in YTM after the position is set results in a decrease in duration and vice­versa (Reinvestment of cash flows at higher rates than original YTM) 4. Duration affected by calls, serial redemptions, and sinking fund provisions All Rights Reserved Dr David P Echevarria 7 BOND PORTFOLIO MANAGEMENT B. Use of Derivative Securities as Hedges 1. 2. 3. Interest rate futures, as well as options on futures May also involve currency hedges SWAP agreements may also be used All Rights Reserved Dr David P Echevarria 8 HOMEWORK QUESTIONS A. What cash flows are associated with bond investments? B. What effects do interest rate increases (decreases) have on; 1. 2. 3. 4. Market values of bonds? Current yields? Yields to maturity? Duration measures? What does it mean when a bond sells at par, at a discount, at a premium? D. What does it mean to immunize a bond portfolio? E. What information is necessary in order to make good bond investments? C. All Rights Reserved Dr David P Echevarria 9...
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