FNCE30001 Lecture 10: Managing Fixed Income Portfolios
27 Jun 2018
School
Department
Course
Professor
Managing Fixed Income Portfolios
unhumrummmurn
BondPomfotioRirkst
Interestrate risk if int ratesNband
priest
but if int ratel band
pricesto capitalboss
Inflation
risk ifinflationis higherthan
expected lower
realreturnthanexpected
inrealterms return
may
evenbe vetwo
wewanthigher
nominal
payments
Creditor default Mik appliesmainlytonon goatdebt
occursif nominal
paymentsare notmadeinfueland
lowontime
lexchange
rate
risk applies
ifyouinvertin abond w1camflowsin aforeigncurrency
ifhomecurrency
appreciates
1
foreigndepreciates lower
returninhome
currency
terms
home
MathematicalProperties
ofBond
Prices
Jimmies hasthe
following
five
features
Bond
priceisinverselyrelated torequired
yield
Thisrelationshipis convex
Ateother
things
beingequal
Thelonger
theteamtomaturity the
greater
lumally the
volatilityblob of
thebond
price
Thehigher
the
couponrate thelower
thevolatilityofthe
bond
price
Thegreater
theconvexity the moreattractivethebandis toinvestors
Recall pw tftp.t tK7
if itchanges to itDie then Pchanges
to Pt
DP
we areinterested in howAPis relatedtoDie 9the
proportionatechangein
priceDMP
aptµdAip ttXLAI
goyim
Toportionatirivative Usuallyvsmall
Ain
yieldXtellsusabout butmeasurable
bonds
yield
elasticity convexity
tr d
Di wecallthistermthe
Fi XD convexity
adjustmentLX
Fi Et.EE
dP I
t.pt tLtti CFt
It if
dApt 9xp where DflutpI tclutpitxatlCtPwplH If
Durationalonvenity
Dduration above
Table to calculate as follows
TinfecarhyetomPVofqamflowPVofoffPoicelPVofoffPricefxTui
ll l il l
Dio
Durationis theweightedaverageterm to maturity where each cam
flow
is
weightedaccording to its PV contributiontoband
price
AKA Macaulayduration
