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.
Ashok is to receive an amount of Rs. 15,00,000 from his relative after 3 years. He wants to buy a house for which he wants the money to be paid now. His relative had already invest
Name two patterns of cash flows for a share of common stock. How does the market define the value of the most common cash flow pattern for common stock? Cash flows for a share
Q. Determine Interest coverage ratio? Current interest coverage ratio = 7000/500 = 14 times Increased profit before interest and tax = 7000 × 1.12 = $7.84m Increased inte
Q. What is Commercial Papers? Commercial Papers: Commercial papers (CPs) are short-term, unsecured securities issued by highly creditworthy large companies. They are issued wit
You have just had your 30 th birthday. You have two children. One will go to college 12 years from now and require four yearly payments for college expenses of RM11,000, RM12,000
What is behind the wave of mergers in the banking industry? A: Various economic factors have caused banking institutions to merge over the past various years. These factors inclu
Taxonomy of financial intermediaries We start by looking at the USA, the largest economy and financial system in the world. Subsequently we will turn to other countries. In the
explain the relationship between shareholders and creditors
Under this approach of Valuation, all cash flows are discounted using single interest rate (discount rate). For example: Consider the 5-year (7.00 percent) Treas
CORPORATE GOVERNANCE Corporate governance can be stated in different ways, for example: The Private Sector Corporate Governance Trust (PSCGT) defines that corporate governan
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