Escolar Documentos
Profissional Documentos
Cultura Documentos
to accompany
Chapter 17
Version 1.2
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Chapter 17 - Bond
Portfolio Management Strategies
Questions to be answered:
What are the four major bond portfolio
management strategies?
What are the two specific passive
portfolio management strategies
available?
Chapter 17 - Bond
Portfolio Management Strategies
What are the five alternative strategies
available within the active management
category?
What is meant by matched-funding
techniques, and what are the four specific
strategies available in this category?
Chapter 17 - Bond
Portfolio Management Strategies
What are the major contingent
procedure strategies that are also
referred to as structured active
management strategies?
What are the implications of capital
market theory for those involved in bond
portfolio management?
Chapter 17 - Bond
Portfolio Management Strategies
What is the evidence on the efficient
market hypothesis as it relates to bond
markets?
What are the implications of efficient
market studies for those involved in bond
portfolio management?
Indexing
Match performance of a selected bond index
Performance analysis involves examining
tracking error
Copyright 2000 by Harcourt, Inc. All rights reserved
P/E Ratio =
(Current Price Per Share)
(Earnings Per Share
where the earnings per share (EPS) measure can be based on either current or future
(i.e., forecasted) firm performance. In broad terms, value and growth managers will
focus on different aspects of this equation when deciding whether a stock should be
added to an existing portfolio. Specifically, a growth-oriented investor will
focus on the EPS component (i.e., the denominator) of the P/E ratio and its
economic determinants;
look for companies that he or she expects to exhibit rapid EPS growth in the future;
and often implicitly assume that the P/E ratio will remain constant over the near
term, meaning that the stock price will rise as forecasted earnings growth is realized.
On the other hand, a value-oriented investor will
focus on the price component (i.e., the numerator) of the P/E ratio; he or she must
be convinced that the price of the stock is cheap by some means of comparison;
not care a great deal about current earnings or the fundamental drivers of earnings
growth; and
often implicitly assume that the P/E ratio is below its natural level and that the
market will soon correct this situation by increasing the stock price with little or no
change in earnings.
Bond swaps
Selling one bond (S) and buying another
(P) simultaneously
Swaps to increase current yield or YTM,
take advantage of shifts in interest rates or
realignment of yield spreads, improve
quality of portfolio, or for tax purposes
Copyright 2000 by Harcourt, Inc. All rights reserved
Bond Swaps
A Global Fixed-Income
Investment Strategy
Factors to consider
Matched-Funding Techniques
Classical (pure) immunization
Interest rate risk
Price risk
Reinvestment risk
Investment horizon
Maturity strategy
Duration strategy
Copyright 2000 by Harcourt, Inc. All rights reserved
Difficulties in Maintaining
Immunization Strategy
Rebalancing required as duration
declines more slowly than term to
maturity
Modified duration changes with a
change in market interest rates
Yield curves shift
Copyright 2000 by Harcourt, Inc. All rights reserved
Matched-Funding Techniques
Dedicated portfolio, exact cash match
Useful for sinking funds and maturing principal payments
Horizon matching
Combines these two techniques by dividing the liability
stream into segments
Contingent Procedures
A form of structured active management
Constrains the manager if unsuccessful
Contingent immunization
duration of portfolio must be maintained at the
horizon value
cushion spread is potential return below current
market
safety margin
trigger point
Copyright 2000 by Harcourt, Inc. All rights reserved
End of Chapter 17
Bond Portfolio Management
Strategies
Future topics
Chapter 18
Applying the valuation model to the market
estimating the earnings multiplier for a stockmarket series
Estimating expected earnings per share
Calculating the expected rate of return on
common stocks
Analysis of world markets
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