Investment Analysis
Report

Managing Bond Portfolio

Corentin Tarlier (S00404537)
Santiago Berisso (S00304739)

Lecturer: Dr. Pedro Gurrolla Date: December 2010
Table of contents
Introduction3

Tools for portfolio manager3

Malkie´s Bond-pricing relationships 3
Duration6
Convexity9
Convexity example10

Passive bond management:11

Immunization strategy11
Immunization example11
Immunization example (2)13
Bond indexing 14
Indexing example 14
Buy and hold strategy15

ACTive bond management:15

Interest rate anticipation 15
Rate anticipation swap16
Pure yield swap16
Horizon analysis16
Mispricing in the fix income market16
Substitution swap17
Inter market spread swap17
Tax swap18
Ladders, Barbells and Bullets strategies18
Ladders strategies18
Barbells strategies19
Bullets strategies19
Contingent immunization19
Simulation of an active bond portfolio19

CONCLUSION22

References23

Introduction:

In the 1950s the bond market was considered a safe, conservative investment. At that time a buy-and-hold strategy was sufficient. However, times changed, in the 1960s inflation increased, and interest rates became more volatile. Thus, with more volatile interest rates, there was a great amount of profit potential with bonds. Also, in the 1970s the Macaulay duration measure was re-discovered. Stock investors have different levels of risk/return requirements; bond investors will do the same thing. A young, aggressive bond investor may choose a high-risk bond and is willing to risk his principal investment. A retiree may not be willing to take a risky bond investment and may, instead invest in conservative bonds. We assume in this report that we are a bond portfolio manager who presenting how manage a bond portfolio. First we will describe the different tools used for manage a bond portfolio then we will present the two family of strategies used by a bond portfolio manager, passive and active strategies.

Tools for portfolio