Bond strategies
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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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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

III


2. Riding The Yield Curve


2. Riding The Yield Curve

The strategy applies to

this portion of the yield curve


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


2. Riding The Yield Curve


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.)


3. Bond Swaps


Bond Swaps (Pure Yield Pickup and Substitution Swaps)


Passive Bond Strategies


Passive Bond Strategies

  • Ladder Strategy

  • Barbell Strategy

  • Immunization

  • Dedicated Cash Flow


1. Ladder Strategy


1. Ladder Strategy


2. Barbell Strategy


2. Barbell Strategy


A Tilt Is Possible, But Then You Are Speculating


3. Immunization


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


4. Dedicated Cash Flow Strategy


4. Dedicated Cash Flow Strategy


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