Contemporary Investments: Chapter 10 Chapter 10 MANAGING BOND PORTFOLIOS What has happened to the volatility of bond prices? How does the term structure.

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Contemporary Investments: Chapter 10 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?

Contemporary Investments: Chapter 10 Brief history of bond market volatility Comparing stock and bond market volatility Impact of bond market volatility on investors

Contemporary Investments: Chapter 10 Figure 10.1 – Range of Long-Term Treasury Bonds’ Annual Yields,

Contemporary Investments: Chapter 10 Figure 10.2 – Monthly Returns on Long-Term Treasury Bonds

Contemporary Investments: Chapter 10 Figure 10.3 – Bond Market and Stock Market Volatility,

Contemporary Investments: Chapter 10 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

Contemporary Investments: Chapter 10 Figure 10.4 – U.S. Treasury Securities Yield Curve

Contemporary Investments: Chapter 10 Analyzing the yield curve – Cont. Market segmentation theory Empirical evidence of yield curve relationships Evidence of market segmentation Actively managing bond portfolios Interest rate expectations strategies

Contemporary Investments: Chapter 10 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

Contemporary Investments: Chapter 10 Figure 10.5 – Slope of the Treasury Yield Curve: June 2000-August 2002

Contemporary Investments: Chapter 10 Figure 10.6 – Types of Yield Curve Shifts

Contemporary Investments: Chapter 10 Bond Management Individual bond selection strategies Guilt by association Passive bond management Indexing bond portfolios Choosing an index Indexing methodologies

Contemporary Investments: Chapter 10 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

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