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Study Session 10-11: Fixed-Income Portfolio Management

Predicted change using partials

Hello everyone,

There is a formula I do not understand and it is driving me crazy:

Predicted change = Portfolio par amount x Partial PVBP x (-Curve shift)

Why do we multiply Curve shift by BOTH portfolio par amount AND PVBP  since both metrics already contain the portfolio value (PVBP = modified duration x Portfolio value x 0.0001). Doesn’t it result in squaring portfolio value ?

Thank you much guys!

Zero Coupon Bond - No Price Risk

I have a really stupid question…. it says in Reading 23  p. 50 that zero coupon bond has no price risk because bond is held to maturity. Why do we assume zero coupon bond are held to maturity? Assume I purchase a 5 year ZCB to immunize my single obligation due in 5 years. One year has passed and interest rates fell, wouldn’t I want to sell to lock its higher price before it matures? 

R23: Exhibit 5: Summing Cash Flows to the Investment Horizon under an Immunization Strategy

As part of the discussion on immunization strategy, Exhibit 5 presents 3 interest rate scenarios- base case, a 100bp downward shift in the yield curve, and a 100bp upward shift in the yield curve. All 3 of these scenarios sum their respective cash flows to an amount in excess of EUR250mm, which is presented as “more than enough to pay off the EUR250mm liability.” 

Reading 24 Yield Curve Strategies Example 8 Assessing Risk of Yield Curve Movements

Hi people, I have tried going through this example for quite some time and I still don’t really understand what it meant by “a Positive one Standard Deviation Move” on the yield curve.

“The first step is to calculate the impact of each of the three main types of yield curve movements - each one a positive one standard deviation move - on the value of each portfolio.

Summarize and explain the pattern of returns resulting from each type of movements.”

Intermarket Carry Trade - Yield Curve Strategies

Hi I cant seem to understand the following  questions in the reading 24 yield curve strategies (Last Case Study Page 221 of curriculum) :

Q27 - Cant understand the working for Return derived for Mexican pesos and the hedging costs derived in the solution 

Q32 - Cant understand the concept

Please help 

Difference between Condor and Butterfly

Yield Curve: steepening (short and intermediate rates fall, and long rates remain stable) + low interest rate volatility

Why in this situation we favor condor (short wings, long body) over butterfly (short barbell, long bullet)? 

Is it because of condor has less convexity than butterfly?

Intermarket carry trade Yield Curve Strategies

Hi needed help with Intermarket Carry Trade in Yield Curve Strategies . Cant seem to understand the topic . Please revert on the forum if anyone can help so i can ask questions regarding the same on personal chat.

Thanks alot :)