{"id":25469,"date":"2013-05-16T18:02:19","date_gmt":"2013-05-16T12:32:19","guid":{"rendered":"http:\/\/vskills.in\/certification\/tutorial\/?p=25469"},"modified":"2024-04-12T14:18:14","modified_gmt":"2024-04-12T08:48:14","slug":"fixed-income-portfolio-management-passive","status":"publish","type":"page","link":"https:\/\/www.vskills.in\/certification\/tutorial\/fixed-income-portfolio-management-passive\/","title":{"rendered":"Fixed Income Portfolio Management \u2013 Passive"},"content":{"rendered":"\n

Fixed Income Portfolio Management \u2013 Passive<\/strong><\/p>\n\n\n\n

Fixed income portfolio management passive is a strategy for managing a portfolio of fixed income securities with a focus on passive management, which means that the portfolio is designed to track the performance of a specific benchmark or index.<\/p>\n\n\n\n

The goal of fixed income portfolio management is to generate consistent income while minimizing risk. This is achieved through a combination of diversification, selection of appropriate securities, and managing the duration and credit risk of the portfolio.<\/p>\n\n\n\n

In a passive management strategy, the portfolio manager aims to replicate the performance of a benchmark index, such as the Bloomberg Barclays U.S. Aggregate Bond Index, by investing in a similar mix of securities. This approach typically involves lower fees and lower turnover, as the portfolio is not frequently adjusted to try to outperform the market.<\/p>\n\n\n\n

Passive fixed income portfolio management is a popular approach for investors who want to achieve stable returns with low risk, as it provides exposure to a broad range of fixed income securities at a lower cost than actively managed strategies.<\/p>\n\n\n\n

Indexation<\/strong><\/p>\n\n\n\n

Indexation involves building a portfolio that replicates an observable index. Problems include numerous index components, liquidity is low for many, and bonds mature. The solution is the \u2018Cell approach\u2019.<\/p>\n\n\n

\n
\"Image<\/figure>\n<\/div>\n\n\n

Immunization<\/strong><\/p>\n\n\n\n

In immunization, the manager protects the portfolio value from changes in interest rates. Net worth immunization involves banks frequently having short-term liabilities (deposits) and long-term assets (loans). Objective here is to minimize the inequality in adjustable rate contracts, resale of loans such as mortgages to a third party, and the use of interest rate futures or other derivatives.<\/p>\n\n\n\n

Target date immunization aims to guarantee a specific value at a specific point in time. It is often used to match an asset\u2019s future value with a future liability. Interest rate risk can be divided into price risk and reinvestment rate risk.  If portfolio duration is equal to planned holding period, then the portfolio is immunized.<\/p>\n\n\n\n

Example<\/p>\n\n\n\n

A pension fund has a fixed liability of Rs. 1 lakh due in 5 years.  Two bonds are available to build a portfolio that matches the liability\u2019s duration.<\/p>\n\n\n\n

Bond A:  9% coupon, 5 years to maturity, D = 4.26 years<\/p>\n\n\n\n

Bond B:  8% coupon, 8 years to maturity, D = 6.21 years<\/p>\n\n\n\n

To generate a portfolio with duration of 5 years, one must determine WA and WB.  YTMA = YTMB = 8%<\/p>\n\n\n\n

Since WB = 1 – WA, (WA) (DA) + (1 – WA) (DB) = H, where H is the holding period or duration of the liability.<\/p>\n\n\n\n

Solving for WA, WA = (H – DB) \/ (DA – DB)<\/p>\n\n\n\n

Hence, the initial position should be 61.8% A and 38.2% B.<\/p>\n\n\n\n

One year passes, interest rates have fallen from 8% to 7%.  DL = 4<\/p>\n\n\n\n

DA = 3.54       DB = 5.62<\/p>\n\n\n\n

Duration does not decline at the same rate as time to maturity. An immunization strategy is not purely passive.  Must periodically rebalance.<\/p>\n\n\n\n

New weights for A and B: 77.9%, 22.1%<\/p>\n\n\n

\n

Apply for Portfolio Manager Certification Now!!<\/h3>\n

http:\/\/www.vskills.in\/certification\/Certified-Portfolio-Manager<\/a><\/p>\n<\/div>\n\n\n

Back to Tutorial<\/a><\/strong><\/h4>\n","protected":false},"excerpt":{"rendered":"

Fixed Income Portfolio Management \u2013 Passive Fixed income portfolio management passive is a strategy for managing a portfolio of fixed income securities with a focus on passive management, which means that the portfolio is designed to track the performance of a specific benchmark or index. 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