Premium Essay

Building a Bond Portfolio

In: Business and Management

Submitted By aleksanv
Words 9379
Pages 38

Investments in a historical perspective

Building a Bond Portfolio

Vitalij Aleksandrov

Gerard Haughey


➢ PART 1

❖ What are bonds?

❖ What types of bonds exist

❖ Tools of analysis

➢ PART 2

❖ Characteristics of a good bond portfolio

❖ Choosing a portfolio strategy

❖ Management of a bond portfolio

➢ PART 3

❖ Creation of our portfolio

❖ Selection of bonds

▪ Analysis of issuer

▪ Technical analysis

▪ Expectations (including risks)

▪ Investment decision

❖ Investment summary

❖ Performance analysis

❖ Effects of crisis on the bonds chosen



What are bonds?

In the same way that people borrow money, companies and governments also need to borrow money. A company needs to fund its expansion, conduct market research, develop new products etc., and the problem large corporations encounter is that they need more money than any single bank can provide. This is particularly the case with governments who need to fund everything from infrastructural projects to securing bank loans. Because they can’t borrow large sums from banks they must turn to the public market and raise money by issuing bonds.

A bond is a fixed income security or a loan given by the bondholders (individual investors) to the issuer (a company or a government). To incentivize people to invest their own money, an added return over the amount lent must be offered in the form of interest payments, known as coupons. The indenture is the contract between the issuer and the bondholder, setting out all of the obligations of the issuer, e.g. the coupon rate, coupon frequency, maturity date, price, and others (Fabozzi, 2012)....

Similar Documents

Premium Essay

Religion in South America

... D C C C 11 12 13 14 15 C B B D B 16 17 18 19 20 D D D B B D 9 5 A 10 Question 1 (60 points): 1. Real assets in the economy include all but which one of the following? A. Land B. Buildings C. Consumer durables D. Common stock 2. ____ is not a derivative security. A. A share of common stock B. A call option C. A futures contract D. All of the above are derivative securities. 3. Active trading in markets and competition among securities analysts helps ensure that __________. I. security prices approach informational efficiency II. riskier securities are priced to offer higher potential returns III. investors are unlikely to be able to consistently find under- or overvalued securities A. I only B. I and II only C. II and III only D. I, II and III 4. The material wealth of society is determined by the economy's _________, which is a function of the economy's _________. A. investment bankers, financial assets B. investment bankers, real assets C. productive capacity, financial assets D. productive capacity, real assets 5. Asset allocation refers to the _________. A. allocation of the investment portfolio across broad asset classes B. analysis of the value of securities C. choice of specific assets within each asset class D. none of the answers define asset allocation 6. An investor in a T-bill earns interest by _________. A. receiving interest payments every...

Words: 1246 - Pages: 5

Premium Essay


...Energy Portfolio management (Like Financial Portfolio management) is the Key to solving today’s and the future’s energy issues….. by Doug Story I believe it has been determined and accepted by almost everyone in the financial management industry and by those of us that invest or have our jobs supply financial instruments such as IRAs, Roth IRAs, 401Ks, etc for our retirement that it is imperative that our financial portfolio be diversified in such a manner that when part of the portfolio drops in value other parts of the portfolio will climb so that we may maintain, protect and continue to grow our funds in preparation for retirement. For example, why was the ENRON collapse such a disaster to most of the employees at ENRON? ENRON management had put pressure on everyone in the company retirement program to put all of their retirement savings into ENRON stock, so when the stock collapsed from its record highs these employees lost everything. If many of the employees at ENRON had invested in a diversified portfolio most of the money they placed in their retirement accounts may have been protected from the collapse of the ENRON stock. What does “Diversified Retirement or Stock Portfolio” mean? Simply put it means having a retirement account that is spread out over a range of stocks, bonds, cash and even precious metals. If the stock market goes down, in theory the bonds and precious metals will stabilize or go up at a rate that equals or reduces the losses due to the......

Words: 1663 - Pages: 7

Premium Essay

Trading Report

...and risk tolerance and evaluate my comfort zone in taking risk. However, as I have 1 millions dollars (money paper) to invest, so I have intention to buy high beta stocks with high risk. In this case, I will choose the stock with beta above 1 (riskier than the market). Before you buy stock in a company, you need to do a little light – reading and doing research. Investing in stock without checking out the company beforehand is a recipe for disaster. In this case, I will do a research online like Yahoo Finance, MSN Money, Investor Guide and The Street to find the most volatile stocks with high risk and high return. Investing in volatile stocks is like riding a roller coaster. When the market is on a roll, taking on more risk in your portfolio can have big rewards, but you will have stomach to deal with potential losses. I chose to buy 2,000 shares of Netflix with a market price $91.84 and the beta is 1.32. Netflix is an amazing success story both in entertainment industry and stock investment. Within 3 years, the company stock price has been increasing from $20 a share to over $100 a shares. Investing in Netflix either I can get a lot of money return or lost a lot of money. I also research for most traded stock on Wall Street Survivor to see which popular investing company is. Amazon, Microsoft, Apple and Ford Motor are most traded stock on market. Then I can narrow down the type of stocks and figure out which company has more potential gain. Stock chart is also......

Words: 1006 - Pages: 5

Premium Essay

Monetary Policy Drivers of Bond and Equity Risks

...importance of nominal bonds in investment portfolios, and in the design and execution of fiscal and monetary policy, financial economists and macroeconomists need to understand the determinants of nominal bond risks. This is particularly challenging because the risk characteristics of nominal bonds are not stable over time. In this paper the authors ask how monetary policy has contributed to these changes in bond risks. They propose a model that integrates the building blocks of a New Keynesian model into an asset pricing framework in which risk and consequently risk premia can vary in response to macroeconomic conditions. The model is calibrated to US data between 1960 and 2011, a period in which macroeconomic conditions, monetary policy, and bond risks have experienced significant changes. Findings show that two elements of monetary policy have been especially important drivers of bond risks during the last half century. First, a strong reaction of monetary policy to inflation shocks increases both the beta of nominal bonds and the volatility of nominal bond returns. Positive inflation shocks depress bond prices, while the increase in the Fed funds rate depresses output and stock prices. Second, an accommodating monetary policy that smooths nominal interest rates over time implies that positive shocks to long-term target inflation cause real interest rates to fall, driving up output and equity prices, and nominal long-term interest rates to increase, decreasing bond prices.......

Words: 679 - Pages: 3

Premium Essay

Problem Set 2

...PC=c(1+y1) +c(1+y2)2+ c+FV(1+y3)3 140.51=20(1+0.05) +20(1+0.06)2+ 20+100(1+y3)3 Y3=5% PD=FV(1+y4)4 85.48=100(1+y4)2 Y4=4% 2) PE=c(1+y1) +c+FV(1+y2)2 FV=100 C=25 PE=25(1+0.05) +25+100(1+0.06)2=135.06 Build a replicating portfolio because arbitrage opportunity only available when selling bonds E and buying a replicating portfolio. So XA CF1A+XB CF1B=CF1c, XA*100+XB*10=25 XA CF2A+XB CF2B=CF2C, XA+0+XB*110=125 XA=0.1364 XB=1.1364 Arbitrage profit is 136-135.06=0.94 In conclusion, the arbitrage profit is $0.94 when building replicating portfolio whih consist of buying 0.1364 bond A and 1.1364 bond B. 3) P=c(1+y1) +c+FV(1+y2)2 105.6=10(1+y1) +10+100(1+y2)2 123.86=20(1+y1) +20+100(1+y2)2 (1+y2)2= 120123.86-20(1+y1) So, 105.6=10(1+y1) +10+100120123.86-20(1+y1) Y1=4.98% 123.86=20(1+0.0498) +20+100(1+y2)2 Y2=7% 4) FV=100 Coupon rate=10% A, if 1 year. CF1=C1+P1 CF1=C1+10+100(1+1Y2)2 Finally, we do not know 1Y2 so that we can’t make sure at what price need to sell the bind. This will lead the customer to liquidity risk. B, if 3 years. Cause is a 2 years bond. CF1=10*(1+1Y3)2+110*(1+2Y3) The investor will face reinvestment risk when they don’t not what rate their cahs flow will reinvested because the question have 2 unknow rate which is 1Y3 and 2Y3. 5) Suppose we have spot rate Ys ,Yt(t>s) and......

Words: 549 - Pages: 3

Premium Essay


...equal to the sum of _________. A. all financial assets B. all real assets C. all financial and real assets D. all physical assets E. none of the above Financial assets do not directly contribute the productive capacity of the economy. 13. _______ are financial assets. A. Bonds B. Machines C. Stocks D. A and C E. A, B and C Machines are real assets; stocks and bonds are financial assets. Difficulty: Easy 14. An example of a derivative security is ______. A. a common share of General Motors B. a call option on Mobil stock C. a commodity futures contract D. B and C E. A and B The values of B and C are derived from that of an underlying financial asset; the value of A is based on the value of the firm only. 17. An example of a primitive security is __________. A. a common share of General Motors B. a call option on Mobil stock C. a call option on a stock of a firm based in a Third World country D. a U.S. government bond E. A and D A primitive security's return is based only upon the earning power of the issuing agency, such as stock in General Motors and the U.S. government. Difficulty: Easy 19. _________ financial asset(s). A. Buildings are B. Land is a C. Derivatives are D. U.S. Agency bonds are E. C and D A and B are real assets. Difficulty: Easy 20. The value of a derivative security _______. A. depends on the value of the related primitive security B. can only cause increased risk. C. is unrelated to the value of the related primitive......

Words: 1247 - Pages: 5

Premium Essay

Finance Engineering

...uance proces Participan in Govern ss; nts nment bond markets; Co onstituent SG accounts; GL Concept of P Primary dealers, Satellite dealers; Se e econdary markets for Gov vernment bonds; Settlem ment of trades in G G-Secs; Clea aring corpora ation; Negoti iated Dealing System; Liq g quidity Adjus stment Facilit ty (LAF).  vernment Se ecurities: Tr reasury Bills s Central Gov Issuance pro ocess; Cut-O yields; Inv Off vestors in T-B Bills; Second dary market a activity in T-b bills.  State Gover rnment Bon nds Gross fiscal deficit of sta Governm ents and its financing; Vo ate olume, Coup rates and ownership pon d pattern of St tate Governm ment bonds.  Call Money Markets Participants in the call markets; Call rates m  Debt: Bonds s Corporate D Market segm ments; Issue process; Iss managem sue ment and Book building; Terms of a debenture iss d sue; Credit rating g.  Commercia Paper & Certificate of Deposits al C f Guidelines fo CP Issue; Rating notc or ches for CPs; Growth in th CP marke Stamp du Certificat of ; he et; uty; tes deposit.  Repos Calculating settlement am mounts in Re transactio epo ons; Advanta ages of Repo Recent os; Repo rate; C issues in rep market in India; Secon po ndary market transactions in Repos; R t Repo accoun nting.  Bond Marke Indices an Benchma et nd arks I-Bex: Sover reign bond in...

Words: 522 - Pages: 3

Premium Essay

Courses on Probability Theory

...autocorrelation. Content: 1. Simple Regression Analysis 2. Multiple Regression Analysis 3. Dummy Variables 4. Heteroscedasticity 5. Autocorrelation Main Textbook: Dougherty, C. (2011). Introduction to Econometrics, 4th edition, Oxford. 2. Module Name: Computational Finance Code: P12614 Credits: 10 Semester: Spring 2011/12 Programme classes: 12 1-2 hour lectures/workshops Aims: The module aims to describe and analyse the general finance topics and introduces students to implement basic computational approaches to financial problems using Microsoft Excel. It stresses the fundamentals of finance; provides students with a knowledge and understanding on the key finance subjects such as money market, return metric, portfolio modelling, asset pricing, etc.; and equips students with the essential techniques applied in financial calculations. Contents: 1. Lecture Topic 1: Money Market Instrument : Introduction to the course; Interest rate types;...

Words: 1425 - Pages: 6

Premium Essay

Bankruptcy and Restructuring at Marvel Entertainment Group

...Companies (Marvel owners)? The Chapter 11 bankruptcy provided an opportunity for all the major stakeholders to evaluate their options regarding their investment and control of Marvel. Bankruptcy alleviated Marvel’s immediate cash shortage, protected it from creditors and some litigation, and provided Marvel with a ‘fresh start.’ Bad strategy: Diversified youth Entertainment Company Bad execution: Overpaying for acquisitions There’s a combination of bad strategy and bad execution caused the problem. First, Perelman attempted to “expand the industry pie” and decrease marginal costs, which instead only worked to distract Marvel from producing quality product. Besides, Perelman showed a poor judgment in several acquisitions aimed at building Marvel into an entertainment empire but which only further distracted the company and paid more than he could earn from the acquisitions At the year 1996, there are more than 70% debts at Marvel entertainment group. The public debts issued by Marvel Holding Companies are 47.2% of the old shares and 9.1% new shares by the time reorganization plan 2. Describe and evaluate the proposed restructuring plan. Will it solve the problems that caused Marvel to file for chapter 11? The restructure plan: Buy 410m new shares for $350m @ $0.85 Acquire remaining Toy Biz with 32% premium Bondholders get 14.6% of shares (77.3m) The restructure will allow Marvel to restructure current debt. Also will allow Marvel to sustain......

Words: 706 - Pages: 3

Premium Essay


...Bachelor of Business (Incorporating Graduate Diploma and Graduate Certificate in Business) Managerial Finance (ACCT 706) Semester Two, 2016 Assignment # 2 Due Date: Week 8, 03/05/16, 12.00 noon Weighting: 25% of the final grade Type: Individual Assignment Length: Approximately 2,000 – 3,000 words excluding appendices Submission: Students are expected to submit a hard copy of the assignment along with Arion generated barcoded assignment cover sheet in the drop box located in WF building (ground floor). All assignments should be submitted via turnitin and a turnitin report should accompany the assignment (Please note: Turnitin submission should precede physical submission and only the hardcopy will be marked). Penalty for late submissions: 10% of the mark obtained for each 24-hour delay including weekends. Page 1 of 6 QUESTION 1: VALUATION OF SHARES (35 MARKS) A. In the world of trendsetting fashion, instinct and marketing savvy are prerequisites to success. Jordan Ellis had both. During 2015, his international casual-wear company, Encore, rocketed to $300 million in sales after 10 years in business. His fashion line covered the young woman from head to toe with hats, sweaters, dresses, blouses, skirts, pants, sweatshirts, socks, and shoes. The Encore shops are now a standard feature in every town in New Zealand. Encore had made it. The company’s historical growth was so spectacular that no one could have predicted it....

Words: 1743 - Pages: 7

Premium Essay

Financial Markets

...benefit from a portfolio manager’s expertise, and from diversification capabilities due to a large portfolio. Mutual funds can provide dividends or capital gain distributions to investors. In addition, investors also benefit from share price appreciation; they may be able to sell the shares at a higher price then what they paid. 2. Open- versus Closed-End Funds How do open-end mutual funds differ from closed-end funds? ANSWER: Shares of open-end mutual funds can be sold back to the sponsoring investment company, whereas shares of closed-end mutual funds cannot. 3. Load versus No-Load Mutual Funds Explain the difference between load and no-load mutual funds. ANSWER: Load mutual funds require a fee to help pay for marketing commissions. No-load mutual funds do not require such a fee. 4. Use of Funds Like mutual funds, commercial banks and stock-owned savings institutions sell shares, but the proceeds received by mutual funds are used in a different way. Explain. ANSWER: Shares issued by commercial banks and savings institutions are used to obtain capital, which may be used to finance their fixed assets such as land and buildings. Shares issued by mutual funds are used to obtain funds, which are invested in the mutual funds portfolio. 5. Risk of Treasury Bond Funds Support or refute the following statement: Investors can avoid all types of risk by purchasing a mutual fund that contains only Treasury bonds. ANSWER: A mutual fund containing Treasury bonds is......

Words: 984 - Pages: 4

Free Essay

Managerial Finance

...Managerial Finance (43-300-02 - CRN#17392) Spring 2014 Place & Time Bank of America Building, Room 208 T&TH 12:00 – 1:15p.m. Instructor: Nancy Ning, PhD Office: Bank of America Building, Room 212F Office Hours: T&TH 11:00 – 11:50 a.m., 2:50 – 4:00 p.m.; W 1:00 – 3:00 p.m. and by appointment Email: Phone: 857-6966 REQUIRED MATERIALS: 1. Principles of Managerial Finance, Brief (6th ed.), plus MyFinanceLab, by Lawrence Gitman & Chad Zutter, Pearson/Prentice Hall, 2011. ISBN-10: 013611945X or ISBN-13: 978-0136119456. 2. Financial calculator: the Texas Instruments’ TI BAII PLUS is recommended. The link gives a tutorial for the use of the calculator. PREREQUISITES: The following courses must have been completed previously with a grade of C or better: ACCT-205 and ECON-208. Students who have not met these prerequisites must drop this course. COURSE DESCRIPTION: The concepts developed in this course form the foundations for the area of finance. Major topics may include time value of money, valuation of stocks and bonds, risk and return, capital budgeting techniques, financial ratio analysis, capital structure and dividend......

Words: 1567 - Pages: 7

Premium Essay

Corporate Finance

...carry on business, a firm invests in tangible assets like plant and machinery, buildings, and intangible assets like goodwill and patents. This comprises of investment decision. These assets do not come free; one has to pay for them, so a company needs to tap various sources of funds including promoter’s contribution. The investment in assets generates revenues and cash flows for a specific period. The managers of the company can either retain cash with the company for further investment of distribute to owners of the company – the shareholders. Concepts Reinforced Profit maximization, social welfare and growth are the three principal competitors to the wealth maximization role. Profit maximization requires managers to keep all expenses low. Businessmen are supposed to be socially responsible. They did not live in an ethical vacuum. Moral standards may change as society evolves. Shareholder wealth maximization rule is based on the assumption that other investor groups in the company are unaffected by the latter’s decision. Potential conflict of interest exists between shareholders and bondholders, managers and shareholders, majority and minority shareholders. So, maximizing wealth of one group could be achieved or the expenses of other groups. Applications to Financial Management Capital Asset Pricing Model (CAPM) is used to estimate expected return from stocks. One source of risk for corporate bonds arises from unexpected changes in the term structure of interest......

Words: 963 - Pages: 4

Premium Essay

Stocktrak Final Paper

...Building a successful investment portfolio is a very important task that millions of people put a lot of time and research into in order to be successful. A portfolio is a mixture of different types of investments that blend together to supply a return in which one can use for whatever is preferred. Over the course of the current semester, my finance class and I have been working on our own personal portfolios via an online investment strategy game called StockTrak. This investment simulation gives an enjoyable way for students to learn how to effectively invest capital into financial assets. Each student was granted one million dollars at the beginning of the investment period in which they can devote towards assets such as stocks, bonds, mutual funds, options, and many other resources in order to maximize their return. Going into this project, I tried to come up with a plan on what my overall goal would be. I decided that I planned on investing in stocks that would offer a greater return in the long run. Letting my stocks continuously grow over many years could have potentially yielded a sufficient return in the long-run. This kind of investing would work well for a retirement fund, which is what I decided my ultimate goal would be. I would plan on using my investment income to support my retired life, or if I was lucky enough, to use to fund my children’s education or any other large future expenditure. Personally I am very risk averse and don’t do well with the...

Words: 1162 - Pages: 5

Free Essay

C & B Team Memo

...Study questions: 1. What are the major assumptions and concepts of the structural frame? The structural frame upholds the notion that organizations are judged primarily on and by the proper functioning of those elements which constitute good organization. For the greater part of the 20th century, the assumptions and concepts of scientific management have informed most theories of practice. One of the earliest precursors of scientific management is Max Weber, hired by Frederick the Great to reorganize the Prussian Army, who conceived the “monocratic bureaucracy” as an ideal form that maximized norms of rationality. His model outlined several major features which include: * A fixed division of labor * A hierarchy of offices * A set of rules governing performance * A separation of personal from official property and rights * The use of technical qualifications (not family ties or friendship) for selecting personnel * Employment as primary occupation and long-term career But, if Max Weber “rationalized” the bureaucracy, Frederick Winslow Taylor “hyper-rationalized’ the bureaucracy. Known as the “father” of scientific management”, he sought an objective, scientific mechanism to improve organizational functioning. Based on these two principal intellectual roots, there are six assumptions of the structural frame: * Organizations exist to achieve established goals and objectives * Organizations increase efficiency and......

Words: 560 - Pages: 3