2. Types of strategies

3. Passive strategy
• Less role expectation
• Key inputs are known at the time of
investment analysis
• Key inputs such as objective of the investors,
risk taking ability
• Type of passive strategy
– Buy & hold strategy
– Indexing strategy

4. Buy & hold strategy
• It simply involve buying a bond & holding it
until maturity
• A manager selects a portfolio of bonds based
on the objectives of the client with the intent
of holding these bonds to maturity
• Investors don’t trade actively to maximize the
return
• Hold the bond with a maturity or duration
which is close to their investment horizon

5. Buy and hold strategy cont…
• Examine factor such as quality rating, coupon
level, terms to maturity, call features etc.
• Only default-free or very high quality securities
should be held
• Also, those securities that are callable by firm
(allows the issuer to buy back the bond at a
particular price and time) or putable by holder
(allows bondholder to sell the bond to issuer at a
specified price and time) should not be included

6. Buy and hold strategy cont…
• The buy-and-hold strategy minimizes
transaction costs
• Suitable for income maximizing investor with
low level of risk
• Applicable for pensioners, endowment funds,
bond mutual funds, insurance companies etc.

7. Indexing strategy
• The objective is to construct a portfolio of bonds
that will equal the performance of a specifies
bond index
• Investment is done only in the bond of specific
bond index
• Barclays Capital Aggregate Bond Index, Merrill
Lynch Domestic Master, J.P. Morgan Government
Bond Index, FTSE UK Gilts Index Series, J.P.
Morgan Emerging Markets Bond Index, Merrill
Lynch High Yield Master II
• Performance is measured in terms of total return
realized over the investment horizon

8. Advantages of indexing
strategy

9. Factors affecting the selection of
the index

10. Active management strategies
• Take advantage of market scenario
• Requires major time to time adjustment or
changes in portfolio
• The goal is to maximize total return but at
increased risk
• Requires continuous analysis and observation
on the part of portfolio manager

11. Types of active management
strategies

12. Interest rate anticipation
• This is the riskiest strategy because the investor
must act on uncertain forecasts of future interest
rates
• When interest rate rise bond price drop & when
interest rate drop bond price rise
• Increase the investment in long duration bonds
when interest rates are expected to decline &
vice versa
• The risk of misestimating interest rate movement

13. Valuation analysis
• Select the bond on the basis of their intrinsic
values
• What are the factors which affect the bonds
intrinsic values?
• Bonds rating, call feature, interest rate etc.
• Buy the undervalued bond & sell the
overvalued bonds
• If bond rating is higher then interest is low and
as result income is low

14. Credit analysis
• It involves detailed analysis of the bond issuer
to determine expected changes in its default
risk
• Internal & external Factors affect the credit
rating of the company such as financial ratios,
inflation, etc.
• Higher the risk higher the return

15. Yield spread analysis
• Yield spread means difference between the
return of two bonds
• Factor affecting yield spread:-
– Business cycle
– Volatility in the market interest rate

16. Matched-funding techniques
• Mixture of passive buy & hold strategy and
active management strategy
• Objective is to get higher return at minimum
risk
• Require constant monitoring
• Could give more return than buy & hold but
not higher than active management strategy