5.5.BKM Ch 16 (Managing Bond PF)

• Overview: do not attempt to identify under/overpriced bonds; assumes prices are fairly set
• Indexing: mirror overall results of the broad mkt (hard because mkt chgs frequently)
• Immunization: attempt to eliminate interest rate risk from FP by either immunizing the net worth or the holding period. In both cases it requires rebalancing the PF
• CF matching: it does eliminate risk, but is severly limits PF choices (could even be possible that no asset match the required duration)

• Overview: attempt to improve returns either by (a) forecasting future rates or (b) identifying mispriced bonds using bond swaps
• Substitution: replace a bond w/ nearly identical substitute w/ a lower price (b)
• Intermarket spread: in anticipation of chgs in spread btwn diff sectors of bond mkt (b)
• Rate anticipation: in anticipation of chg in rate that might affect some bonds more than others (a)
• Pure yield pickup swap: replace low yielding bonds w/ higher yield bonds (a)
• Tax swap: try to achieve some tax benefit

Actively manage PF as long as value doesn't dip to or below a pre-defined trigger. At that point, active mgmt ceases and the PF is immunized.

• It assumes that interest rate only chg by small amt
• It assumes parallel shifts in term structure
• It ignores inflation