Already have an account? Get multiple benefits of using own account!
Login in your account..!
Remember me
Don't have an account? Create your account in less than a minutes,
Forgot password? how can I recover my password now!
Enter right registered email to receive password!
Bond indexation serves the purpose of replicating the performance of a predetermined benchmark as closely as possible. These benchmarks are generally very broader in terms of number of bonds encompassed. For example, in countries like US and Europe, the most common indices include several thousands bonds. Further, the turnover on indices is substantially quite large. This is because of substantial proportion of the bonds maturing each year and significant amounts being issued each year. Very frequently, large segments of bond market behave illiquid. Hence, futures on bond indices are currently a rare phenomenon. In general they are based on notional bonds.
Now, let us discuss about indexing technology. In this section, we will focus on stratified and optimization sampling techniques.
Stratified Sampling: Stratified sampling aims to limit the number of bonds included in the indexed portfolio and also avoid trading too small bond positions. In addition, it also tries to avoid being in the illiquid segment of the market. Under stratified sampling, an indexed portfolio is constructed through following below given steps:
-
Initially, the universe of bonds in the benchmark is divided into cells on the basis of certain characteristics of bonds. The characteristics include coupon, term to maturity duration, quality rating and sector etc. Subsequently, the weight of each cell is determined given the weights of bonds in the benchmark.
In the second step, for each cell with non-zero weight, a limited number of bonds belonging to the cell are selected and a price weighted portfolio is created. This portfolio matches as closely as possible some of the average characteristics of the cell such as its average duration, convexity etc., and holds appropriate weight in the indexed portfolio.
In case of bonds, the rationing in the number of bonds comes from the explicit limit the indexer imposes while building a bond portfolio for each cell.
Optimized Sampling: Optimized sampling overcomes the drawbacks of stratified sampling approach. It has the following advantages.
It provides an ex-ante measure of the tracking error of the indexed portfolio with regard to benchmark.
It gives access to an optimizer, which facilitates construction of a portfolio by considering the risk trade-off between factors and the transaction costs.
It allows the indexer to choose the level of tracking error to be achieved by limiting the number of bonds in the indexed portfolio.
As of November 1, 1999, the exchange rate in between the Brazilian real and U.S. dollar is R$1.95/$. The agreement forecast for the U.S. and Brazil inflation rates for the next 1-y
Discuss the advantages and disadvantages of the gold standard. Answer: The benefits of the gold standard include: (I) as the supply of gold is restricted, countries cannot compr
Once capital markets are integrated, it is hard for a country to maintain a fixed exchange rate. Explain why this may be so. Answer: one time capital markets are integrated int
If the cost benefits of interest rate swaps would similarly be arbitraged away in competitive markets, what other descriptions exist to explain the rapid development of the interes
Free Cash Flow Free cash flow presents the amount of cash generated by the existing operations of a corporation and that is not needed for reinvestment in new projects in the f
Lenders in the US insist upon some kind of mortgage insurance. There are broadly two types of mortgage insurance - one is
Expalin about the Non-Convertible Debentures (NCDs) NCDs are plain debenture securities issued by corporations. They are normally medium term in nature, maturing between 1 to 8
Illustration Vishal Mehta & Co., Mumbai issued 7%, 5-year bond on 31st December 2006. The par value of a bond is Rs. 100. This bond pays interest annually and
Q. What is denoted by weighted average cost of capital OR Composite? How is it calculated? Exemplify with an example. Ans. Weighted Average Cost of Capital: - Capital formation
Define the meaning of procurement Term procurement was used in a broad sense so as to include the whole gamut of raising funds externally.
Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!
whatsapp: +91-977-207-8620
Phone: +91-977-207-8620
Email: [email protected]
All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd