Choosing the right benchmark for fixed-income securities is a crucial task that involves understanding a client's goals and limitations. Matching the benchmark to the liability or portfolio is essential, but it's more straightforward for equities than fixed income due to…

Investors can access bond markets directly or indirectly. Bond markets are often less liquid than stock markets, so indirect methods are commonly used to earn fixed-income returns without incurring the higher costs and commissions associated with direct bond trading. Pooled…

Pure Index/ Full Replication Approach Pure indexing is the strictest form of indexing, requiring the exact same securities in the portfolio as in the index, with the same weights. This can be costly due to numerous transactions and associated fees….

Hedge amounts do not consider convexity. They are just approximations based on duration. Duration is only accurate for parallel shifts in the yield curve. Structural risk occurs when twists in the yield curve happen, and a zero-coupon bond may not…

 When deciding on the best structure for a fixed-income portfolio, managers rely on essential metrics like duration and convexity. While various portfolio setups have similar interest rate exposure, their convexities differ. Convexity, combined with the manager’s interest rate outlook,…

Cash Flow Matching Cash flow matching is a safe and straightforward strategy. It entails purchasing a zero-coupon bond with an amount equal to each liability's due date. Alternatively, coupon-bearing bonds can be used for cash flow matching. The principle or…

Immunization This strategy aims to reduce portfolio return volatility, enhancing the predictability of future portfolio values. For large portfolios, it can help immunize specific liabilities. Cash Flow Matching The simplest approach involves purchasing a zero-coupon bond with the same face…

Liability-Driven Investing (LDI) is primarily an institutional investor strategy suitable for entities with known future financial obligations. Insurance companies and defined benefit (DB) pension plans are common examples. Common Terminology Asset-Liability Management (ALM) – A strategy that considers how assets…

Consider a portfolio manager at a defined benefit pension plan with a PBO (Projected Benefit Obligation) of $2.57 billion. The effective duration of this obligation is calculated to be 9.35, resulting in a BPV (Basis Point Value) of liabilities as…

Taxable and Tax-exempt Investors Taxable and tax-exempt investors share a common goal of maximizing risk-adjusted returns. The CFA exam is designed with a global perspective and does not require candidates to possess specific country knowledge. Nevertheless, noting several similarities in…