Chapter 10 MANAGING BOND PORTFOLIOS• What has happened to the volatility

of bond prices?

• How does the term structure of interest rates affect bond investors?

• What are some active bond management strategies?

• How can bond portfolios be managed passively?

• What are interest rate swaps?

Brief history of bond market volatility

• Comparing stock and bond market volatility

• Impact of bond market volatility on investors

Figure 10.1 – Range of Long-Term Treasury Bonds’ Annual Yields, 1948-2002

Figure 10.2 – Monthly Returns on Long-Term Treasury Bonds

Figure 10.3 – Bond Market and Stock Market Volatility, 1926-2002

Analyzing the yield curve

• What is the yield curve?

• Implied forward rates

–Locking in future returns

• Theories of the yield curve

• Pure expectations theory

• Liquidity preference theory

Figure 10.4 – U.S. Treasury Securities Yield Curve

Analyzing the yield curve – Cont.• Market segmentation theory

• Empirical evidence of yield curve relationships

• Evidence of market segmentation

• Actively managing bond portfoliosInterest rate expectations

strategies

Analyzing the yield curve – Cont.• Riding the yield curve (horizon

analysis)

– Yield curve strategies

– Optimal yield curve strategies

• Yield spread strategies

• Pure yield pick up swap

• Tax swaps

• Foreign exchange strategies

Figure 10.5 – Slope of the Treasury Yield Curve: June 2000-August 2002

Figure 10.6 – Types of Yield Curve Shifts

Bond Management

• Individual bond selection strategies

• Guilt by association

• Passive bond managementIndexing bond portfolios

• Choosing an index

• Indexing methodologies

Bond Management- Cont.• Tracking error

• Immunization– Target date immunization

• Cash flow matching and multiperiod immunization

• Net worth immunization

• Interest rate swaps

• What is an interest rate swap

– Purpose of interest rate swaps

– Example of an interest rate swap