Tài chính doanh nghiệp - Chapter 16: Managing bond portfolios

Chapter 16Managing Bond PortfoliosActive strategyTrade on interest rate predictionsTrade on market inefficienciesPassive strategyControl riskBalance risk and returnBasic StrategiesInverse 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.Bond Pricing RelationshipsAs 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.Bond Pricing Relationships (cont’d)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.Duration is equal to maturity for zero coupon bonds.DurationDuration: Calculation8%BondTimeyearsPaymentPV of CF(10%)WeightC1 XC4.54038.095.0395.019714036.281.0376.03761.52.0401040sum34.553855.611964.540.0358.88711.000.05371.77421.8852Duration Calculation: Spreadsheet 16.1Price change is proportional to duration and not to maturity.P/P = -D x [(1+y) / (1+y)D* = modified durationD* = D / (1+y)P/P = - D* x yDuration/Price RelationshipRules for DurationRule 1 The duration of a zero-coupon bond equals its time to maturity.Rule 2 Holding maturity constant, a bond’s duration is higher when the coupon rate is lower.Rule 3 Holding the coupon rate constant, a bond’s duration generally increases with its time to maturity.Rule 4 Holding other factors constant, the duration of a coupon bond is higher when the bond’s yield to maturity is lower.Rules for Duration (cont’d)Rules 5 The duration of a level perpetuity is equal to:Rule 6 The duration of a level annuity is equal to:Rules for Duration (cont’d)Rule 7 The duration for a corporate bond is equal to:YieldPriceDurationPricing Error from convexityDuration and ConvexityCorrection for ConvexityCorrection for Convexity:Bond-Index FundsImmunization of interest rate risk:Net worth immunizationDuration of assets = Duration of liabilitiesTarget date immunizationHolding Period matches DurationCash flow matching and dedicationPassive ManagementSubstitution swapInter-market swapRate anticipation swapPure yield pickupTax swapActive Management: Swapping StrategiesMaturityYield to Maturity %3 mon 6 mon 9 mon1.5 1.25 .75Yield Curve RideContingent ImmunizationA combination of active and passive management.The strategy involves active management with a floor rate of return.As long as the rate earned exceeds the floor, the portfolio is actively managed.Once the floor rate or trigger rate is reached, the portfolio is immunized.Interest Rate SwapsContract between two parties to exchange a series of cash flowsOne party pays a fixed rate and receives a variable rate One party pays a variable rate and receives a fixed ratePayments based on notional principalSwap Example Figure 16-11Swap DealerCompany BCompany ALIBORLIBORLIBOR7%6.95%7.05%