Fixedincome portfolio management 1, 2 2017 aplan, inc. Fixedincome portfolio management 1, 2 study sessions 10 and 11 topic weight on exam 1020% schwesernotestm reference book 3, pages 200303 fixed income portfolio management, study sessions 10 and 11, often become intertwined with the derivatives, currency, and assetliability management material in earlier and later study sessions. Macaulay, modifi ed, and approximate duration 162 3. Fixed income risk models 2002 we chose yield book tracking error because. Fixed income analysis is a model new model of frank fabozzis fixed income analysis, second model that provides authoritative and uptodate protection of how funding professionals analyze and deal with fixed income portfolios. You can also invest in fixed income securities with bond mutual funds, exchangetraded funds, and fixed income derivatives. Fixed income analysis is a new edition of frank fabozzis fixed income analysis, second edition that provides authoritative and uptodate coverage of how investment professionals analyze and manage fixed income portfolios. Learn more about the fixed income analysis tools limitations and exclusions. Treasury securities, which is adjusted to take into account an embedded option. This 2part course will introduce you to the main products and players in fixed income markets. The necessary info to fixed income portfolio administration, from the specialists at cfa. Immunization risk can be thought of as a measure of the. Fixed income attribution is the process of measuring returns generated by various sources of risk in a fixed income portfolio, particularly when multiple sources of return are active at the same time. Money duration of a bond and the price value of a basis point.
First trust low duration strategic focus etf ldsf first trust senior loan fund ftsl first trust tactical high yield etf hyls first trust tcw opportunistic fixed income etf fixd first trust tcw securitized plus etf deed first trust tcw unconstrained plus bond etf ucon taxfree fixed income. Access more than 300 fixed income calculations, including effective and partial durations, as well as convexities, spreads, and yields, with the ability to access pointintime and time series data with as much history as required. Variable insurance trust core fixed income, variable insurance trust high quality floating rate. Mar 25, 2019 fixed income is an investment that returns a payment to you on a regular schedule. While limited duration bonds are generally subject to less interest rate sensitivity than longer duration bonds, there can be no assurance that interest rates will rise during the life of the trust. Municipal fixed income funds hold bonds that are issued by municipalities such as cities and states. Duration and convexity are two tools used to manage the risk exposure of fixedincome investments. Both equity equity accounts equity accounts consist of common stock, preferred stock, share capital, treasury stock, contributed surplus, additional paidin capital, retained earnings other comprehensive earnings, and treasury stock. Understanding duration and convexity of fixed income securities vinod kothari notation y. Municipal bonds generally receive favorable tax treatment.
Equity is the funding a business receives from the owners or shareholders of the company. The credit market is the component of the fixedincome market that includes both publicly traded debt securities such as corporate bonds, sovereign and nonsovereign government bonds, supranational bonds, and commercial paper and nonpublicly traded instruments such as. Nov, 2019 duration and convexity are two tools used to manage the risk exposure of fixed income investments. Most bond investors know that interest rate changes can affect the value of their fixed income holdings. Blackrock believes it is important for you to have a working understanding of duration, and how it can be used to help assess the appropriateness of a fixed income strategy.
It typically includes investments like government and corporate bonds, cds and money market funds. Key rate duration fixed income cfa level 1 analystprep. The journal of fixed income jfi provides sophisticated analytical research and case studies on bond instruments of all types investment grade, highyield, municipals, abs and mbs, and structured products such as cdos and credit derivatives. Video would be covering as how traders across the globe giving too much valuation to. Since publication over eight years ago, the markets have experienced cathartic change. Key terms for familiarizing yourself with fixed income and bonds duration. Fixed income analysis introduces the fundamental concepts of fixedincome securities and markets and provides indepth coverage of fixedincome security valuation and portfolio management. Chapter 3 fixed income securities 35 2 term structure of interest rates our objective here is to value riskless cash. Let us assume the risk free rate of return is flat, that is, the same over different maturities. Fixed income can offer a steady stream of income with less risk than stocks. The change in the spread can result from a change in credit risk or. In the market, this information on the time value of money is. Short duration income, short duration tax free, shortterm conservative income, strategic income and u. Our fixed income management process is fundamentally driven, disciplined and value oriented.
The interest on most municipal bonds is tax free at the federal level and is tax free for investors who buy municipal bonds that are issued within their state of residence. The effective duration of a traditional option free fixed rate bond is its sensitivity to the benchmark yield curve, which can differ from its sensitivity to its own yieldtomaturity. Analyze across the global fixed income market access more than 300 fixed income calculations, including effective and partial durations, as well as convexities, spreads, and yields, with the ability to access pointintime and time series data with as much history as required. Depending on your financial goals, fixed income investments can offer many potential. This work acquires greater value for professionals by providing practical illustrations for a number of advanced quantitative tools and techniques for. Many investors may have questions regarding the nature of duration as it relates to their fixed income investments. Understanding fixed income risk and return 153 learning outcomes 153 1. In the market, this information on the time value of money is given in several different forms. For example, the risks affecting the return of a bond portfolio include the overall level of the yield curve, the slope of the yield curve, and. In the second edition of fixed income analysis, financial expert frank fabozzi and a team of knowledgeable contributors provide complete coverage of the mo. Examples of fixed income securities include various bond types as well as investments that hold bond collections, such as bond mutual. Duration is a measure of the sensitivity of the price the value of principal of a fixed income investment to a change in interest rates. Fixed income arbitrage is not really a riskfree arbitrage. The yield expectation, in turn, may be seen as composed of a a risk free rate.
Fixed income analysis introduces the fundamental concepts of fixed income securities and markets and provides indepth coverage of fixed income security valuation and portfolio management. We construct portfolios using duration management, yield curve positioning, sector allocation, and security selection, and use these strategies as a blueprint to strive to earn results for you. Chapter 6 yield measures, spot rates, and forward rates 119. Total return % total return represents changes to the nav and accounts for distributions from the fund. The essential guide to fixed income portfolio management, from the experts at cfa. Market price % market price return represents changes to the. First trust low duration strategic focus etf ldsf first trust senior loan fund ftsl first trust tactical high yield etf hyls first trust tcw opportunistic fixed income etf fixd first trust tcw securitized plus etf deed first trust tcw unconstrained plus bond etf ucon tax free fixed income. This best fixed income book is a practical quantitative manual on the study and evaluation of fixed income securities which provides a unique perspective on global fixed income markets as well. How a bond or bond portfolios value is likely to be impacted by rising or falling rates is best measured by duration. Duration is a measure of the sensitivity of the price the value of principal of a fixedincome investment to a change in interest rates. In more technical terms, bond duration is measurement of interest rate risk.
A comprehensive introduction to the key concepts of fixed income analytics. When the price of an asset is considered as a function of yield, duration also measures the price sensitivity to yield, the rate of change of price with respect to. Duration measures the bonds sensitivity to interest rate changes. Equity accounts equity accounts consist of common stock, preferred stock, share capital, treasury stock, contributed surplus, additional paidin capital, retained earnings other comprehensive earnings, and treasury stock. Fixed income is an investment that returns a payment to you on a regular schedule. Understanding bond duration can help investors determine how bonds fit in to a broader investment portfolio. Therefore, modified duration and effective duration on a traditional option free fixed rate bond are not necessarily equal. For a traditional optionfree fixedrate bond, the same duration and convexity statistics apply if a change occurs in the benchmark yield or a change occurs in the spread. While limited duration bonds are generally subject to less interest rate sensitivity than longer duration bonds, there can be no assurance that.
While most recent studies of duration emphases on the defaultriskfree bonds. The book contains a general framework for valuation that is designed to be accessible to both professionals and those new to the field. With detailed information from cfa institute, this guide contains comprehensive, exampledriven presentations of all. Because for all optionfree bonds modified duration is positive, the above equation states that there is an inverse relationship between. The first edition of introduction to fixed income analytics skillfully covered the fundamentals of this discipline and was the first book to feature bloomberg screens in examples and illustrations. Interest rate risk, reinvestment risk, liquidation. Understanding fixedincome risk and return 153 learning outcomes 153 1. It calculates the price of a riskfree bond, and therefore. With detailed information from cfa institute, this guide contains comprehensive, example. Pdf properties and limitations of duration as a measure of time. Bond duration is a way of measuring how much bond prices are likely to change if and when interest rates move. The ishares national muni bond etf seeks to track the investment results of an index composed of investmentgrade u. Utilize factsets broad terms and conditions coverage, thirdparty pricing, and proprietary bond.
Page 109 immunization against nonparallel shifts equating the duration of the portfolio with the duration of the liability does not guarantee immunization. Although fixed income indices are not strictly constant duration, their duration often remains sufficiently constant that the indices can be thought of as duration targeted. Understanding duration and convexity of fixed income. Fixedincome attribution is the process of measuring returns generated by various sources of risk in a fixed income portfolio, particularly when multiple sources of return are active at the same time for example, the risks affecting the return of a bond portfolio include the overall level of the yield curve, the slope of the yield curve, and the credit spreads of the bonds in the portfolio. Although fixed income indices are not strictly constant duration, their duration often remains sufficiently constant that the indices can be thought of as durationtargeted. The yield of a fixed income security or portfolio is the interest rate that ties the stream of future cash flows to the current price. The optionadjusted spread oas is the measurement of the spread of a fixedincome security rate and the riskfree rate of return typically that of u. With a 1% increase in yield for a certain maturity. Fixed income fundamentals course corporate finance institute.
You can also invest in fixed income securities with bond mutual funds, exchangetraded funds, and fixed income. Test on fixed income for cfa level 1 proprofs quiz. Gain fixed income exposure at an average expense ratio of 0. Monte carlo approach provided best estimate of fixed income securities returns we buy lots of nonlinear stuff.
Fixed income is an investment approach focused on preservation of capital and income. This does not mean that there is no volatility in prices of fixed income securities the prices of fixed income securities change primarily due to change in investors yield expectation. Fixed income also includes certificates of deposit, savings accounts, money market funds, and annuities. In finance, the duration of a financial asset that consists of fixed cash flows, for example a bond, is the weighted average of the times until those fixed cash flows are received. The interest on most municipal bonds is taxfree at the federal level and is taxfree for investors who buy municipal bonds that are issued within their state of residence. The spread is added to the fixedincome security price to make the riskfree bond price the same as the bond.
Industry experts offer detailed models and analyses of fixed income structuring, performance. So, this is a defaultfree bond, which is exposed to market risk only. This has largely been made possible due to changes in the markets themselves along. Fixed income analysis cfa institute investment series pdf. Fixed income fundamentals course corporate finance. The handbook of fixed income securities frank fabozzi. Top best fixed income books traditionally, fixed income securities are considered as rather lowincome instruments but of late there has been a tremendous shift in the fixed income markets which have become increasingly attractive to modern investors in terms of strategic growth and returns made possible. This course teaches using real market data and examples of the most commonly used bloomberg screens for bonds. As a general rule, the price of a bond moves inversely to changes in interest rates. Ghanshyam groups economics department has forecast that interest rates are going to change by 70 basis points. Short duration income, short duration taxfree, shortterm conservative income, strategic income and u. The fixed income analysis tool is designed for educational purposes only and you should not rely on it as the primary basis for your investment, financial or tax planning decisions. Access market opportunities with greater ease than with individual bonds. When the price of an asset is considered as a function of yield, duration also measures the price sensitivity to yield, the rate of change of price with respect to yield or the percentage change in price for a.