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Bond Strategies

Bond Strategies. Active and Passive. Active Bond Strategies. Active Bond Strategies. Strategic Frontier (Best Case - Worst Case) Interest Rate Anticipation Riding the Yield Curve Bond Swaps. 1. Strategic Frontier. 1. Strategic Frontier. 1. Best Case - Worst Case. I. II. IV.

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Bond Strategies

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  1. Bond Strategies Active and Passive

  2. Active Bond Strategies

  3. Active Bond Strategies • Strategic Frontier (Best Case - Worst Case) • Interest Rate Anticipation • Riding the Yield Curve • Bond Swaps

  4. 1. Strategic Frontier

  5. 1. Strategic Frontier

  6. 1. Best Case - Worst Case I II IV III

  7. 2. Riding The Yield Curve

  8. 2. Riding The Yield Curve The strategy applies to this portion of the yield curve

  9. Assumption: You Have Money To Invest For Two Years Only • Option A: Invest in a 1-Year T-Bill at 6%, then roll it over for a second year (at the then-available rate) • Option B: Invest in a 2-year T-note at 7% • Option C: Invest in a 3-year T-note at 8% and sell it after 2 years

  10. 2. Riding The Yield Curve

  11. Assuming No Shift in the Yield Curve: • Option A yields a 6% return • Option B yields an 7% return • Option C (riding the yield curve) yields a 9.8% return. (Return = 1.8% price increase plus 8.0% current yield.)

  12. 3. Bond Swaps

  13. Bond Swaps (Pure Yield Pickup and Substitution Swaps)

  14. Passive Bond Strategies

  15. Passive Bond Strategies • Ladder Strategy • Barbell Strategy • Immunization • Dedicated Cash Flow

  16. 1. Ladder Strategy

  17. 1. Ladder Strategy

  18. 2. Barbell Strategy

  19. 2. Barbell Strategy

  20. A Tilt Is Possible, But Then You Are Speculating

  21. 3. Immunization

  22. 3. Immunization • “Locks in” a guaranteed rate of return • Exactly offsets the change in price with the change in reinvestment income. • The point of immunization is where: Time Horizon = Average Duration

  23. 4. Dedicated Cash Flow Strategy

  24. 4. Dedicated Cash Flow Strategy

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