Lecture 05dm Fixed Income Portfolio Analysis
Lecture 05dm Fixed Income Portfolio Analysis
https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=billratesAll
https://www.macrotrends.net/2016/10-year-treasury-bond-rate-yield-chart
Risk Reduction - Hedging
From Investopia:
• Hedge: Making an investment to reduce the risk of adverse
price movements in an asset.
• Normally, a hedge consists of taking an offsetting position in a
related security, such as a futures contract.
• An example of a hedge would be if you owned an asset then
sold a futures contract stating that you will sell your asset at a
set price, therefore avoiding market fluctuations.
• Investors use this strategy when they are unsure of what the
market will do. A perfect hedge reduces your risk to nothing
(except for the cost of the hedge).
1+ y 1+ y + n (c − y )
D
= −
my mc (1 + y )n − 1 + my
V1 + V2 = PV (of obligation)
D1V1 + D2V2 = Target Portfolio Duration x PV
V1 = $292,788.70
V2 =$121,854.27
• Let’s use the first 2 bonds (Hertz and Columbia) to meet the
obligation of the previous example of $1M in 9 years.
https://www.sifma.org/resources/research/
us-fixed-income-securities-statistics/
MBS
23.1%
Assignments
• Luenberger 3.3, 3.7, 3.10, 3.13, 3.14, 3.16