Chapter 11, Problem 11CP

Summary Introduction

(a)

To describe:

The fixed income portfolio management strategy for changes in level of interest rate

Introduction:

There is an inverse relation between bond prices and yields and that the interest rates fluctuate variedly. As interest rates rise or falls, bond holders tend to incur losses or gains.

Summary Introduction

(b)

To describe:

The fixed income portfolio management strategy for changes in the yield spread across/between sectors.

Introduction:

Since bond yields are forever changing, that leads to change in yield spread as well. The yield spread may increase means the yield difference between two bonds may increase if one sector is performing better than other. When spread difference decreases, the yield difference also decreases. Hence suggesting that one sector is not performing better than other. In this scenario we conclude two things, first being that bond yield and bond spread are directly related. Secondly yield difference can be used as tool to understand the performance of one sector in comparison with another.

Summary Introduction

(c)

To describe:

The fixed income portfolio management strategy for changes in the yield spread on particular instrument.

Introduction:

A yield spread is the difference between yields on differing debt instruments of varying maturities, credit ratings and risk, calculated by deducting the yield of one instrument from another.