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BOND MATH: The Theory Behind the Formulas by Donald J. Smith

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CHAPTER 9

Bond Portfolios

Finally, we get to bond portfolios. In reality, investors do not hold, and borrowers do not issue, bonds in isolation; they are clustered in asset and liability portfolios. The question for analysis is how well the statistics about an individual bond—its yield to maturity, its duration and convexity—translate to a portfolio. That is, how do we calculate the yield, duration, and convexity of the overall portfolio? It's not as obvious as it might seem because it is not just a matter of calculating the market-value-weighted averages of the individual statistics. Sometimes that produces a reasonable number; other times it is very misleading. Sometimes when we work with portfolio summary statistics we even venture into the ...

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