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!
Return Enhancement can be explained using following heads:
Use of a Valuation Model: An investor having access to a bond valuation model can build a bond portfolio from bonds that are designated as mispriced on the low side by the model. A significant point here is - the nature of a bond valuation model is much more technical compared to equities. Further, fungibility or interchangeability between bonds in terms of their risk characteristics is more than that found in equities. In other words, the switches in between bonds that may be suggested by a valuation model have more true arbitrage characteristics than the switches among equities.
Options Overwriting: A portfolio manager can enhance the returns of a bond portfolio through options overwriting, which means writing interest rate related calls or puts. The forecast for bonds depends on the timing of long-term interest rates.
Minimization of the Value of the Bond Portfolio: The portfolio manager can minimize the value of the bond portfolio while implementing liability funding methods. For example, let us discuss the return enhancement technique while immunizing a single liability. Suppose the problem of the portfolio manager is
The two constraints the portfolio manager experiences are:
In the above equations Pi denotes price of bond i.
The first constraint results in an asset portfolio composed of only bonds. The second constraint causes the duration of the bond portfolio to match the duration of the liability. This technique of optimization is popularly known as linear programming. Such a problem can be solved in a simple way by using well established algorithms. The portfolio manager has to make sure whether the internal rate of return of the bond portfolio thus constructed is more or less similar to the rate he has used to discount the present value of the liability. If not, the portfolio manager in order to discount the liability must optimize again using the internal rate of return of the earlier optimal portfolio.
An important point here is the choice of the set of bonds over which the optimization will take place. Such set must be homogeneous in terms of quality rating. Otherwise, the optimized portfolio will concentrate just on those bonds that result in higher yields as they are cheap and does not consider their risky nature.
Given the following information, find the Weighted Average Cost of Capital (WACC). Assume the corporate tax rate is 35%, and give an answer based on market values of debt and equi
Q ualification criteria We discussed how to prepare the bid documents. Let us now see what criteria should be considered to qualify a bidder. You will have to open bidding
Leverages 'Leverages' are of prime importance in the analysis of a companies' risk. They give a good picture of the business, financial and the overall risk of a company's oper
1. Consider the following two investment alternatives Net cash flow End of year Machine A Machine
QUESTION An audit team is currently engaged in planning the audit of the financial statements of E Limited as at 30 June 2007. This was the first accounting period during which
Examine the components of working capital & also explain the concepts of working capital.
What is the difference between pro forma financial statements and a cash budget? Explain why pro forma financial statements are not used to forecast cash needs. Pro forma
How are financial trades made in an over-the-counter market? Discuss the role of a dealer in the OTC market. In difference to the organized exchanges, which have physical locat
1. List the common elements of a submission for a major resource acquisition (purchase) 2. What is the difference between: A fixed asset and current asset? 3. If you worked i
Q. Disadvantage or redundancy of excessive working capital? Excessive working capital means idle funds which earns no profit for the business operation it should have nighters
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