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Bond Strategies

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Bond Strategies

Active and Passive

Active Bond Strategies

- Strategic Frontier (Best Case - Worst Case)
- Interest Rate Anticipation
- Riding the Yield Curve
- Bond Swaps

I

II

IV

III

The strategy applies to

this portion of the yield curve

- 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

- 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.)

Passive Bond Strategies

- Ladder Strategy
- Barbell Strategy
- Immunization
- Dedicated Cash Flow

- “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