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sector risk- prepayment risk- convexity risk
- if spread is to widen, buy short duration, sell longer duration
- is used when there is concerns about economy slowing down
- the analysis divides the yields on corporate bonds by the yields on treasuries
- aka horizon matching- duration matched, first few years would also
be CF matched- benefit: provide liquidity in initial period, reduce risk
associated with nonparallel shifts in the yield curve
- callable and putable bonds- e.g.if rates are to fall, putable bonds tend to underperform nonputable issues
- increase in new issues tend to decrease relative yields (when rates fall, new issues and refinances occur)
- aka excess achievable return- current immunization rate - minimum acceptable return
3 structural changes are; securities with embedded options at a
premium due to scarcity, longer durations at premium due to tendency
toward intermediate term, and credit-based derivatives are increasingly
used
- it refers to ranking credit sectors, bond structures, issuers, and
issues in terms of their expected performance over some future time
period
- A and L have the same PV- A and L have the same aggregate duration-
the range of the distribution of duration of assets exceeds distribution
of liabilities* assumption is parallel shifts
- classic single-period immunization- contingent immunization- multiple liability immunization- CF matching
- durationportfolio value 0.01
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