Chapter 11 (Bond Portfolios) Flashcards
Cash Flow Matching
Matching cash flows from a fixed-income portfolio with those of an obligation.
Convexity
The curvature of the price-yield relationship of a bond.
Dedication Strategy
Refers to multiperiod cash flow matching.
Horizon Analysis
Forecast of bond returns based largely on a prediction of the yield curve at the end of the investment horizon.
Immunization
A strategy to shield net worth from interest rate movements.
Intermarket Spread Swap
Switching from one segment of the bond market to another.
Macaulay’s Duration
A measure of the effective maturity of a bond, defined as the weighted average of the times until each payment, with weights proportional to the present value of the payment.
Modified Duration
Macaulay’s duration divided by 1 + yield to maturity. Measures interest rate sensitivity of bond.
Pure Yield Pickup Swap
Moving to higher yield bonds, usually with longer maturities.
Rate Anticipation Swap
A switch made in response to forecasts of interest rate changes.
Rebalancing
Realigning the proportions of assets in a portfolio as needed.
Substitution Swap
Exchange of one bond for a bond with similar attributes but more attractively priced.
Tax Swap
Swapping two similar bonds to receive a tax benefit.