Active Fixed Income and Credit Management by F. Hagenstein, Tim Bangemann

By F. Hagenstein, Tim Bangemann

The authors give you the reader with an in depth device set for energetic and winning administration of fastened source of revenue portfolios in addition to for credit. the point of interest of debate is on quantitative and, for credit, qualitative tools of portfolio administration. those innovations should be hired for portfolio diversification and so that it will outperform the benchmark. tools appropriate for various possibility components - period, yield curve, foundation, volatility and credits administration - are illustrated intimately utilizing a top-down and bottom-up procedure. numerous examples are provided to teach the sensible relevance of the theoretical types and procedure.

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Sample text

The yield of a strip is predominantly a function of the shape of the yield curve, although other factors – such as supply and demand, market view, and future interest rate expectations – also play a role. In general, there are three methods for valuing strips: ■ using the conventional bond yield curve ■ using the equivalent-duration method ■ using the theoretical zero curve (bootstrapping). The yield spread between a strip and a coupon-bearing bond with a similar maturity is often used as an indication of whether a strip is rich or cheap.

This statement is true even though the convexity of strips is lower than the convexity of conventional bonds with the same duration, since a duration-neutral switch requires a larger amount of strips. 13 (using market data in August 2000). 0m Bund Jan–24. 27) are bought against the sale of the bond. Strips can also be used to decrease the foreign exchange exposure. Because of the higher duration and the lower price of strips compared with conventional bonds, an investor outside Europe could purchase a lower nominal amount of German zero-coupon bonds while keeping the exposure to overall yield levels unchanged.

If interest rates have already been trending lower in the past, the probability for declining future yields increases: the reasons for this could be either technical or fundamental. Momentum can be interpreted, for example, as a gradual reaction of the market to a change in monetary policy (fundamental background). Determining confidence levels in decision making is of particular importance for the duration-management decision process. Here, one differentiates between three different confidence levels: low, moderate, and high.

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