Chapter 11 (Bond Portfolios)

Question 1

Cash Flow Matching

Answer 1

Matching cash flows from a fixed-income portfolio with those of an obligation.

Question 2

Convexity

Answer 2

The curvature of the price-yield relationship of a bond.

Question 3

Dedication Strategy

Answer 3

Refers to multiperiod cash flow matching.

Question 4

Horizon Analysis

Answer 4

Forecast of bond returns based largely on a prediction of the yield curve at the end of the investment horizon.

Question 5

Immunization

Answer 5

A strategy to shield net worth from interest rate movements.

Question 6

Intermarket Spread Swap

Answer 6

Switching from one segment of the bond market to another.

Question 7

Macaulay’s Duration

Answer 7

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.

Question 8

Modified Duration

Answer 8

Macaulay’s duration divided by 1 + yield to maturity. Measures interest rate sensitivity of bond.

Question 9

Pure Yield Pickup Swap

Answer 9

Moving to higher yield bonds, usually with longer maturities.

Question 10

Rate Anticipation Swap

Answer 10

A switch made in response to forecasts of interest rate changes.

Question 11

Rebalancing

Answer 11

Realigning the proportions of assets in a portfolio as needed.

Question 12

Substitution Swap

Answer 12

Exchange of one bond for a bond with similar attributes but more attractively priced.

Question 13

Tax Swap

Answer 13

Swapping two similar bonds to receive a tax benefit.