Investment Management - 9 - 07-Bond Strategy

8/2/2019 Investment Management - 9 - 07-Bond Strategy

http://slidepdf.com/reader/full/investment-management-9-07-bond-strategy 1/64

Let’s try toLet’s try tounderstand aunderstand a

story of astory of ayoung dynamicyoung dynamicmanager…manager…

Interesting!!!!!!!!!!!



We started in the last classWe started in the last class

…MANAGING BOND RISK ...…MANAGING BOND RISK ...





One of the basic issue behindOne of the basic issue behind

Investment Strategy in bonds is...Investment Strategy in bonds is...

“How to ensure a balance

between risk and return

while making a suitable

portfolio of bonds so as tosatisfy the risk-return

appetite of an investor?”



INVESTMENT STRATEGIES forINVESTMENT STRATEGIES forbonds………bonds………

• Investment strategies are broadly

classified into the following categories:

Passive or Buy - and - Hold Strategy

Semi-Active Strategy

Active Strategy



First……First……

Passive orBuy-and-Hold

Strate



PASSIVE STRATEGYPASSIVE STRATEGY

• A buy-and-hold strategy is one whereby an

investor buys and holds bonds till the

maturity or redemption.

• In it, the primary objective of the investor is

to maximise the income over a period through

coupon and its reinvestment.

• Passive Strategies are the strategies that

once they are formed do not require active

management or changes.



PASSIVE STRATEGYPASSIVE STRATEGY ((continuedcontinued…)…)

• A passive strategy requires noeconomic forecasting or on going

asset allocation decisions. In it, once a

portfolio is established, one simplywaits until the term of bond expires.

• If bonds’ market is efficient, thensuch a strategy would be very useful

strategy.

• The investor does not activel seek



PASSIVE STRATEGY…???PASSIVE STRATEGY…???

• Some of the passive strategies may

be

Bond Ladder Strategy

Bond Barbell Strategy

Bond Bullet Strategy

Investment in Index Fund



BOND LADDER STRATEGYBOND LADDER STRATEGY

Bond value changes daily and an investor can avoid losses arising dueto these fluctuations by acquiring short-term bonds. They usually have

higher transaction cost and lower yields.

On the other side, the opposite strategy is to buy longterm bond but they are having high interest rate risk.

But, if a portfolio of bonds is constructed with maturities

distributed over a period of time, then it can have the

advantages of short-term bonds as well as long term bonds.

• A bond portfolio construction strategy that invests

approximately equal amounts in every maturity within

a given range.



BOND LADDER STRATEGYBOND LADDER STRATEGY ((continuedcontinued…)…)

• The most important advantage of such astrategy is that all the bonds would not maturein the same interest rate environment; as aconsequence-

If rates rise the value of our portfolio may fall, but we donot need to sell bonds that haven’t matured andwhatever bonds are matured that would be sold at theredemption value.

If cash is needed, the maturing bonds offer a readysource of cash.

Such a strategy is inflexible and if an investor seeks totake advantage of anticipated changes in interest rates



Time

A m o u n t

I n v e s t e d

LADDER STRATEGY

“INVEST EQUALLY IN ALL MATURITY”



BOND BARBELL STRATEGYBOND BARBELL STRATEGY

• In this strategy, an investor acquires portfolioconsisting of very long and very short termmaturity bonds.

• The Bond Barbell Strategy places “heavyweights” on very long and very shortmaturities, with no position in

intermediate term securities

• A fixed income securities strategystrategy in which thematurities of the securities included in the

PortfolioPortfolio are concentrated at two extremes.



BOND BARBELL STRATEGYBOND BARBELL STRATEGY ((continuedcontinued…)…)

• The advantage of this is - an investor needs to revise onlyhalf of his/her portfolio depending upon the expectation

of changes in interest rates. If interest rates are expected

to rise, then he/she should sell the long-term bonds and

invest in short term and do the opposite if the interest rates are expected to fall.

• Following this strategy may mean that the

investor is unable to match maturities with cash

needs as effectively as he/she could do with that

of the Ladder Strategy.

• This strategy as compared to LADDERED ONE is more

risky if the anticipation about future interest rates go



Time

A m o u n t

I n v e s t e d

BARBELL STRATEGY

“INVESTMENT

CONCENTRATED AT TWO

EXTREMES OF MATURITY”



BOND BULLET STRATEGYBOND BULLET STRATEGY

• A single maturity is at the heart of the bulletstrategy. However, the essence is that thematurities of the bonds in the portfolio areconcentrating towards one maturity time.

• Under Bond Bullet Strategy, the maturities are concentratedUnder Bond Bullet Strategy, the maturities are concentrated

towards one end of the yield curve.towards one end of the yield curve.

• It can be best used when investor has a strong sense of theIt can be best used when investor has a strong sense of thewhen money will be needed.when money will be needed.

• Another reason to have such a strategy could be to position

a portfolio in response to strong anticipated change ininterest rates in one direction.



BOND BULLET STRATEGYBOND BULLET STRATEGY ((continuedcontinued…)…)

• One of the advantages of the Bullet Strategy is toOne of the advantages of the Bullet Strategy is tofocus cash flows to meet expected future expendituresfocus cash flows to meet expected future expenditures

such as buying a business in future. Zero-couponsuch as buying a business in future. Zero-coupon

bonds could be appropriate in these situationsbonds could be appropriate in these situations

because they eliminate reinvestment risk and providebecause they eliminate reinvestment risk and provide

a known amount of cash at maturity.a known amount of cash at maturity.

• Another reason to have such a strategy could be to

position a portfolio in response to strong anticipated

change in interest rates in one direction.



Time

A m o u n t

I n v e s t e d

BULLET STRATEGY

“INVESTMENT

CONCENTRATING TOWARDS

ONE MATURITY”



INVESTMENT IN INDEX FUNDINVESTMENT IN INDEX FUND

• In this strategy, an investor selects an appropriateindex of bond market and invest in it!

• The basic philosophy of the Index Fund is - “if you can’t

beat the market, go along with it” - which is based onthe notion of Efficient Financial Markets. It is usuallyadopted by those funds who strongly believe that theycan not outperform the market.

• The idea of such a strategy is to create a portfolio thatmirrors the broad market and supposedly minimizessystematic or market related risk.



INVESTMENT IN INDEX FUNDINVESTMENT IN INDEX FUND ((continuedcontinued…)…)

• Bond Index funds are having lot of practical problemsas bonds are continually dropped from the index as the

mature and that requires a revision.

• Also, if the index is consisting of large number of securities, then it will be very costly to create and

maintain such a portfolio.

• Generally, funds uses the publicly available indices but

they may use their own customized index specifically

designed to meet certain investment objectives.



INVESTMENT IN INDEX FUNDINVESTMENT IN INDEX FUND ((continuedcontinued…)…)

• There are three ways that are widely used in theindustry to replicate a particular index-

Purchase all the bonds in an index in a proportion that appear

in the Index. Such an approach is called PURE BONDINDEXING.

An alternative to selecting all bonds is to use only a sample.

Another approach which is known as CELL MATCHING

approach involves decomposing the index into cells based on

some feature like credit rating, sector, duration etc. and then,

select a sample of bonds from each cell.



Indices reported by NSE…Indices reported by NSE…

NSE G-Sec Index for the day As on 3-July-2007

As on 03-July-2007

Index Total ReturnsIndex

PrincipalReturnsindex

Avg. Coupon Avg.ResidualMaturity

PortfolioYTM

PortfolioDuration

PortfolioModifiedDuration

PortfolioConvexity

ALL 248.43 118.3 8.350 9.228 8.577 5.406 5.184 55.636

1-3 211.31 90.91 8.641 2.162 8.713 1.966 1.884 4.433

3-8 246.35 106.55 8.929 5.365 8.465 4.261 4.088 21.902

8+ 294.71 131.42 7.988 14.927 8.606 8.135 7.799 98.799

TB 227.34 227.34 0.000 0.322 7.443 0.317 0.306 0.164

GS 250.99 109.06 8.350 10.415 8.585 6.069 5.820 62.842



Second……Second……

…Semi-Active



SEMI - ACTIVE INVESTMENT STRATEGY -SEMI - ACTIVE INVESTMENT STRATEGY -

INTEREST IMMUNIZATION STRATEGIESINTEREST IMMUNIZATION STRATEGIES

• An investment strategy that immunizes a bond portfolio from

interest rate fluctuations is called IMMUNIZATION STRATEGY.

• An immunization strategy refers to that strategy adopted by

investors to shield their overall financial status from exposure to

interest rate fluctuations.

• A portfolio of bond is said to be immunized if the value of the

portfolio at the end of a holding period is insensitive to interestrate changes. OR, IMMUNIZATION said to exist if the total value

of a portfolio of bonds at the end of a holding period is equal to

the value of the portfolio based on the YTMs that existed when

urchased.



SEMI - ACTIVE INVESTMENT STRATEGY - INTEREST

IMMUNIZATION STRATEGIES (continued…)

• MATCH THE MATURITY is a crude way to achieve somedegree of immunization. However, DURATION is an

important and a better tool for immunizing a bond

portfolio and therefore, we should use it for

immunization.

• Under the assumption that a yield curve is flat or there

are parallel shifts in it , it can be shown that a bond

portfolio will be immunized completely if holding periodis exactly equal to duration. In doing so, one ensures a

balance between price risk and reinvestment risk. That’s

to say that when holding period is equal to duration, the

change in price with respect to change in interest rate

E E E E E E E





• If an investor buys a bond whose duration is

equal to holding period, then any parallel shift

in the yield curve in near future would have

price and interest rate effects that exactly

offset each other.

• To achieve immunization, the duration of the

bond must be equal to the remaining time in

the horizon period. Hence, immunization

requires active management, called

EM VE NVE MEN R EG N ERE





• If Holding period/Horizon Period is same as

DURATION then the IMMUNIZATION STRATEGY

adopted is called HOLDING PERIOD

IMMUNIZATION.

• In this case, changes in the interest rate do not

change the HOLDING PERIOD RATE OF RETURN

or HORIZON RATE OF RETURN.

SEMI ACTIVE INVESTMENT STRATEGYSEMI ACTIVE INVESTMENT STRATEGY




INTEREST IMMUNIZATION STRATEGIESINTEREST IMMUNIZATION STRATEGIES (continued…)

• Immunization, that is ensuring

equality between the portfolio

duration and the holdingperiod, can be achieved using

either of the following -Ladder

Barbell

Bullet





DEDICATIONDEDICATION

• DEDICATION(also known as CASH FLOW MATCHING) is concerned with financing a stream of

liabilities over a period of time; match the receipt

of cash flows from bonds to the liabilities payment

over a period of time.

• A dedicated portfolio of bonds seeks to match the

receipt of cash flows with the need for the funds sothat the interest and the principal amounts are matchedwith the payment schedule of the investor.

• No reinvestment is done here. Therefore, it has no





DEDICATIONDEDICATION

• In it, if structured properly, the portfolio of bonds will cash itself out in the sense that

between every two successive liability

payments, the cash flow from the principalpayment and coupon receipts would be

sufficient to cover the next liability payment.

• The biggest risk with cash-flow matching

strategies is that the bonds selected to match

forecasted liabilities may be called, if they have

a call option, forcing the investment manager



Third……Third……

……ActiveStrategy……ActiveStrategy



ACTIVE INVESTMENT STRATEGYACTIVE INVESTMENT STRATEGY

• Active investment strategy involves switchingand swapping bonds as circumstances changes

in the market for fixed income securities.

• Active investment strategies are based on theassumption that the bond market is not so

efficient , thereby giving some investors the

opportunity to earn above average-profits.

• Portfolio managers with the ability to identifymispriced bonds or to “time” the bond market by

accurately predicting interest rates can make

use of the active investment strategy.

•




ACTIVE INVESTMENT STRATEGYACTIVE INVESTMENT STRATEGY(continued…)(continued…)

• Active Investment Management Strategy involvessecurity selection,where attempts are made at

identifying mispriced bonds and involves market timing,

where attempts are made at forecasting general

movements in interest rates and take the advantage of turnings.

• It involves the following steps:

Determine the proper pricing of bonds under

consideration and try to identify over-and under-priced

bonds.

Forecast the level and change in the yield curve

Given the forecast determine the impact of change on the

current portfolio




• Active Management Strategies are of two typeOne, Bond Swap Strategies; and

Second, Yield Curve Shift Strategies.

• Some of the Bond Swap Strategies may be:

Substitution SwapQuality Swap

Inter-Market Spread Swap

Rate Anticipation Swap

Pure Yield Pickup Swap

Tax Swap

Liquidity Swap

Besides these, one may have Contingent

Immunization-as Active Investment Strategy.

ACTIVE INVESTMENT STRATEGYACTIVE INVESTMENT STRATEGY(continued…)



Substitution SwapSubstitution Swap

• Substitution Swap Strategy is based on theconcept of ‘temporary mis-pricing’ which is

arising due to an imbalance in the relative

supply and demand conditions in the market.

• It is an exchange of one bond for a nearly

identical substitute but with a belief that the

market has temporarily mispriced the twobonds and that the discrepancy between the

prices of bonds represents a profit

opportunity.



Substitution Swap-Substitution Swap-ExampleExample

•EXAMPLE:Consider the following two bonds -

Bond A yielding 7.5% and it is a AA bond.

(presently held bond)

Bond B yielding 7.85% and it is also AA bond.

Here, Substitution Swap will mean sell

Bond A and Buy B; thus get higher yield.



• Quality Swap Strategy is based on the

concept of ‘yield spread’ which is arising

due to differences in yields between

bonds of different qualities. (we all knowthat bonds of different risk quality has

different yield)

• If it is believed strongly that an economy

is improving and becoming strong, then

investors may see less credit risk in low

quality(but, higher return). In such a

Quality SwapQuality Swap



Quality Swap-Quality Swap-ExampleExample


Bond A yielding 7.5% and it is a AA bond.

(presently held bond)

Bond B yielding 7.95% and it is also A bond.

Here, Quality Swap will mean sell Bond A and

Buy B; thus get higher yield if we are expectingno default in near future due to better

economic conditions.



Inter-Market Spread SwapInter-Market Spread Swap

• The Inter-market Spread Swap is pursued

when an investor believes that the yield

spread between two sectors/segments of

the bond market is temporarily out of line.



Inter-Market Spread SwapInter-Market Spread Swap --ExampleExample

•EXAMPLE:Consider the following-

Bond A is trading in BSE Debt Segment at a price

yielding 7.5% and it is a AA bond.

The same Bond A is trading at a price in NSE debt

segment yielding 7.75%.

Here, Inter-Market Spread Swap will meansell Bond A at BSE and Buy the same



Rate Anticipation SwapRate Anticipation Swap

• Such a swap are geared toward profiting from ananticipated movement in the overall market

prices.

• It is pegged to interest rate forecasting. In case, if investors believe that rates will fall, then they will

swap bonds of longer duration. Conversely, if

rates are expected to increase, they will swap to

shorter duration bonds.

• Rate Anticipation Swap means that depending

upon the anticipation about future interest rates,

one can swap bonds with different durations. For



Rate Anticipation Swap-Rate Anticipation Swap-ExampleExample

•EXAMPLE:

Consider the following two bonds -

Bond A is Zero-Coupon yielding 8% with maturity of 20

years. (presently held bond)

Bond B is 10% Coupon yielding 6.25% with a maturity of 5

years.

If an investor is expecting the interest rate to rise

in future, then Rate Anticipation Swap will mean

sell Bond A and Buy B; thus get minimum capital

lP Yi ld Pi k



Pure Yield Pickup SwapsPure Yield Pickup Swaps

• These swaps are oriented toward yielimprovements over the long-term, with littleheed being paid to interim price movements inthe market.

• The basic idea of this swap strategy is toincrease return by holding higher-yield bonds.When the yield curve is upward sloping, the

pure yield pickup swap entails moving intolonger - term higher-yield bonds. In this case,the investor is willing to accept higherinterest rate risk.

l k E l



Pure Yield Pickup Swap-Pure Yield Pickup Swap-ExampleExample


Bond A yielding 8% and it is having 5-year

maturity. (presently held bond)

Bond B yielding 8.85% and it is having a 10-year

maturity.

If the investor is concerned only with the

PURE YIELD, then Pure Yield Pickup

Swap will mean sell Bond A and Buy B;



• Sometimes, bonds with same quality

have different yields and one of cause

of differences is tax. If such a difference

is not exactly off-set the advantages of

tax benefits, there is a possibility of

some swap strategy for obtaining higher

rate of return after tax. Then, investors

may adopt tax-swap strategies.

Tax SwapsTax Swaps



• EXAMPLE:

Consider the following two bonds -

Bond A yielding 8% and it is a taxable bond.

(presently held bond)Bond B yielding 5.75% and it is a tax-free

bond.

If the investor is paying 30% tax, then

Tax Swap will mean sell Bond A and

Buy B; thus get higher yield(after

tax).

Tax Swaps-Tax Swaps-ExampleExample

Li idit SLi idit S



• Sometimes, bonds with same quality

may have different yield or price

because of differences in liquidity of bonds. If an investor is not concerned

about the liquidity of a bond as he has

no intention of trading in that, then hecan take advantage of higher yield of a

less liquid bond. That is to say, an

investors may swap higher liquidity

Liquidity SwapLiquidity Swap

d E l



• EXAMPLE:

Consider the following two bonds -Bond A yielding 8% and it is a bond having very good

liquidity in the market. (presently held bond)

Bond B yielding 8.75% and it is a comparatively less

liquid bond but is of same quality as that of Bond A.

If the investor is very keen in possessing highly liquid

bonds, then Liquidity Swap will mean sell Bond A andBuy B; thus get higher yield. It is because of the fact

that the investor is willing to take ‘liquidity liquidity

premium premium’.

Liquidity Swap-Liquidity Swap-ExampleExample

Yield Curve Shifts and BondYield Curve Shifts and Bond



Yield Curve Shifts and Bond Yield Curve Shifts and Bond

StrategiesStrategies

Yield Curve Shift Strategies make forecasts about likelyshifts in yield curve and then devise an appropriatebond investment strategy to profit from such forecasts.

Three types of yield curve shifts occur with someregularity:

1. Parallel Shifts

2. Shifts with Twists3. Shifts with Humpedness



ParallelParallel

Parallel Shifts: It takes place when rateson all maturities change by the samenumber of basis points.

YTM

M

•

e urve s:e urve s:



e urve s:e urve s:TwistTwist

Shifts with a Twist: A tw i s t is a non-parallelshift, it takes place when rates are changingdifferently with either a flattening orsteepening of the yield curve.

Flattening: The spread between long-term and short-term rates decreases.

Steepening: The spread between long-term and short-term rates increases.

•

e urve s:e urve s:



e urve s:e urve s:TwistTwist

Shifts with a Twist:Flattening:

Steepening:

↓− )YTMYTM(STLT

YTM

M

ST LTM

YTM

ST LT

•

••

••

•

•

•

•

↑− )YTMYTM( STLT

Yield Curve Shifts:Yield Curve Shifts:



Yield Curve Shifts: Yield Curve Shifts:HumpednessHumpedness

Shifts with Humpedness: A shift withhumpedness is a non-parallel shift in whichshort-term and long-term rates change bygreater magnitudes than intermediate rates.

Positive Butterfly: There is an increase in bothshort and long-term rates relative tointermediate rates.

Negative Butterfly: There is a decrease in bothshort and long-term rates relative to

intermediate rates.

•

Y e d Curve S ts:e urve ts:



Y e d Curve S ts:e urve ts:HumpednessHumpedness

Positive Butterfly: ST and LT rates change morethan intermediate:

Negative Butterfly: Intermediate rates changemore than ST and LT:

YTM

MST LT

M

YTM

ST LT

•

••

••

Yield Curve ShiftY e urve t



Yield Curve Shift Y e urve tStrategiesStrategies

When the view about yield curve is -

Negative ButterflyNegative Butterfly

1. The bu l le t s t r a t egy is formed by constructing

a portfolio concentrated in one maturity area.

1. The ba rbe l l s t r a t egy is formed withinvestments concentrated in both short-termand long-term bonds.

1. The l a dde r s t r a t egy is formed with equallyallocated investments in each maturity group.

•




Yield Curve Shift Y e urve tStrategies…Strategies…

When the view about yield curve is –

Negative ButterflyNegative Butterfly

In such a case, the investor should go for theba rbe l l s t r a t egy which will be formed withinvestments concentrated in both short-termand long-term bonds as rates of intermediaries

maturity are going to increase.

•

5 5555




Yield Curve Shift Y e urve tStrategies…Strategies…

When the view about yield curve is -

Positive ButterflyPositive Butterfly

In such a case, the investor may go for theBu l l e t S t r a t egy which will be formed byconstructing a portfolio concentrated in onematurity area as rates of short-term as well as

long term maturity are going to increase.

•

55 555




Yield Curve Shift Y e urve tStrategiesStrategies

Yield Curve Strategies

If investors expected a simple downward parallel shift in the yieldcurve, a bu l l e t s t r a t egy with longer duration bonds would yieldgreater returns than an investment strategy in intermediate orshort-term bonds if the expectation turns out to be correct.

.

The ba rbe l l s t r a t egy could be profitable for an investor who isforecasting an upward negative butterfly yield curve shift.

Yield Curve Shift Strategies If investors expected a simpledownward parallel shift in the yield

curve, a bu l l e t s t r a t egy with longer duration bonds would yield

greater returns than an investment strategy in intermediate or

short-term bonds if the expectation turns out to be correct..

•

CONTINGENT IMMUNIZATIONCONTINGENT IMMUNIZATION



CONTINGENT IMMUNIZATION…CONTINGENT IMMUNIZATION…

• Such a strategy has a combination of Immunization Strategy and Active InvestmentStrategy.

• In this strategy, the investor prescribes the

minimum acceptable target yield and accordinglyit is worked out how much can be devoted toactive bond investment strategy.

• In case, the investment amount falls below thatwhich will give minimum acceptable target yield,then the accepted investment strategy becomesthat of immunization.

• Thus, contingent immunization strategy means



That’s what we want

to discuss about

bonds’ investment

strategy

INCOME OR LOSS SOURCES DIFFERENTREINVESTMENT RATES

1 3 5 6.79 7 9 10

HOLDING PERIOD IN YEARS



1 3 5 6.79 7 9 10

COUPON INCOME 5% Rs. 90 Rs. 270 Rs. 450 Rs. 611 Rs. 630 Rs. 810 Rs. 900

CAPITAL GAIN/LOSS Rs. 287 Rs. 234 Rs. 175 Rs. 117 Rs. 110 Rs. 39 Rs. -

INTEREST - ON - INTEREST Rs. 1 Rs. 17 Rs. 54 Rs. 106 Rs. 113 Rs. 197 Rs. 250

TOTAL RETURN Rs. 378 Rs. 521 Rs. 679 Rs. 834 Rs. 854 Rs.1,046 Rs. 1,150


CAPITAL GAIN/LOSS Rs. 132 Rs. 109 Rs. 83 Rs. 57 Rs. 53 Rs. 19 Rs. -




CAPITAL GAIN/LOSS Rs. - Rs. - Rs. - Rs. - Rs. - Rs. - Rs. -




CAPITAL GAIN/LOSSRs. (112) Rs. (96) Rs. (75) Rs. (53) Rs. (50) Rs. (18) Rs. -


TOTAL RETURN Rs. (20) Rs. 214 Rs. 504 Rs. 822 Rs. 863 Rs.1,308 Rs. 1,569


CAPITAL GAIN/LOSS Rs. (209) Rs. (180) Rs. (144) Rs. (102) Rs. (97) Rs. (36) Rs. -


TOTAL RETURN Rs. (116) Rs. 138 Rs. 463 Rs. 834 Rs. 883 Rs.1,422 Rs. 1,747

Interest Rates remain constant at 10%

Reinvestment Rate at the end of Year



10% 10% 10% 10% 10% 10%

Year 1 2 3 4 5 6

88.00Rs. 96.80Rs. 106.48Rs. 117.13Rs. 128.84Rs. 141.72Rs.

88.00Rs. 96.80Rs. 106.48Rs. 117.13Rs. 128.84Rs.

88.00Rs. 96.80Rs. 106.48Rs. 117.13Rs.

88.00Rs. 96.80Rs. 106.48Rs.

88.00Rs. 96.80Rs.

88.00Rs.

Total 88.00Rs. 184.80Rs. 291.28Rs. 408.41Rs. 537.25Rs. 678.97Rs.

979.17Rs.

1,658.15Rs.

10% 10% 9% 9% 9% 9%

Year 1 2 3 4 5 6

88.00Rs. 96.80Rs. 106.48Rs. 116.06Rs. 126.51Rs. 137.89Rs.

88.00Rs. 96.80Rs. 105.51Rs. 115.01Rs. 125.36Rs.

88.00Rs. 95.92Rs. 104.55Rs. 113.96Rs.

88.00Rs. 95.92Rs. 104.55Rs.

88.00Rs. 95.92Rs.

88.00Rs.


996.48Rs.

1,662.17Rs.

+ Bond Value at the end of year 6

Total Value of the portfolio at the end of year 6

Interest Rates falls to 9% After 3 Years




Interest Rates rise to 11% After 3 Years




10% 10% 11% 11% 11% 11%

Year 1 2 3 4 5 6

88.00Rs. 96.80Rs. 106.48Rs. 118.19Rs. 131.19Rs. 145.63Rs.

88.00Rs. 96.80Rs. 107.45Rs. 119.27Rs. 132.39Rs.

88.00Rs. 97.68Rs. 108.42Rs. 120.35Rs.

88.00Rs. 97.68Rs. 108.42Rs.

88.00Rs. 97.68Rs.

88.00Rs.


962.32Rs.

1,654.79Rs.

10% 10% 13% 13% 13% 13%

Year 1 2 3 4 5 6

88.00Rs. 96.80Rs. 106.48Rs. 120.32Rs. 135.96Rs. 153.64Rs.

88.00Rs. 96.80Rs. 109.38Rs. 123.60Rs. 139.67Rs.88.00Rs. 99.44Rs. 112.37Rs. 126.97Rs.

88.00Rs. 99.44Rs. 112.37Rs.

88.00Rs. 99.44Rs.

88.00Rs.


929.94Rs.

1,650.03Rs.



Interest Rates rise to 13% After 3 Years




HORIZON RATE OF INTEREST AND INTEREST

60%



20%

-10%

0%

10%

20%

30%

40%

50%

1% 3% 5% 7% 9% 11% 13% 15% 17% 19%

H O R I Z O N

R A T E O

F R E T U R N

H = 1

H = 2

H = 4

H = Duratio

H = 30

H = 20

Documents

Investment Management - 9 - 07-Bond Strategy