Fixed Income Investment Strategies Flashcards
3 key reasons for purchasing fixed income securities
- Generating Income - fixed income > dividends
- Reducing Risk - balance out stocks
- Capital Appreciation - fixed income securities appreciate better than certain stocks/in certain instances
Describe Maturity Risk
(Fixed Income Securities Risk)
The longer the maturity, the bigger the risk.
(More sensitive to interest rate risk)
Describe Credit Quality Risk
(Fixed Income Securities Risk)
Not all bond issuers are equally reliable…
(may not pay up)
Describe Sector Risk
(Fixed Income Securities Risk)
Sector is the type of bond (Treasuries, corporates, municipals, agencies, etc.)
Different sectors, different risks
What is the “Sector Spread?”
It represents the risk premium being paid to investors for their willingness to invest in a particular sector
(measuring performance basically)
Describe the difference between Active Bond Strategies and Passive Bond Strategies
Active Bond Strategy - requires a ton of trading and a LOT of capital
Passive Bond Strategy - is more “buy and hold” generally speaking
Describe the Dedication Strategy (of Passive Bond Strategies)
You simply match the maturity of the bond with what you need
(e.g. I need to pay for education in 10 years - Bond with 10 year maturity)
Describe the Indexed bond Management Strategy (of Passive Bond Strategies)
Bonds linked to an index (Inflation bond is most popular)
Describe the Laddered Approach Strategy (of Passive Bond Strategies)
Buying equal amounts of bonds across the yield curve (e.g. 1 yr, 3 yr, 5 yr, 7, 9)
Once the 1 yr matures, re-invest in 10 yr; when 3 yr matures reinvest in 10 yr; and so on
Describe the Barbell Strategy (of Passive Bond Strategies)
Investing in 2 extremes: short term and long term
(Have to re-invest those short term yields and roll over long term middle maturity into other long terms)
Describe the Bond Immunization Strategy (of Passive Bond Strategies)
By using duration as a measure of interest rate risk, you can structure a bond portfolio to essentially eliminated interest rate risk (AKA Immunize against risk)
What is a “Bond Swap?”
A common technique whereby an investor sells one bond and uses the proceeds to buy another bond, often at the same price.
What is a tax swap?
Selling a bond at a loss (for tax purposes) then buying a similar but not identical one
True or False
Municipal bonds always give the investor a tax break on the interest earned over the life of the bond
False; while municipal bonds are exempt from regular income tax, some municipal bonds are subject to the alternative minimum tax
True or False
Inflation indexed bonds have interest payments that fluctuate based on changes in inflation
True
