Fixed Income Analysis, Second Edition

CHAPTER 16

INTRODUCTION TO BOND PORTFOLIO MANAGEMENT

I. INTRODUCTION

The products of the fixed-income market, the risks associated with investing in fixed-income securities, and the fundamentals of valuation and interest rate risk measurement were covered. In depth coverage of the valuation of fixed-income securities with embedded options, features of structured products (mortgage-backed securities and asset-backed securities), and the principles of credit analysis were covered. Now, we will put all these tools together to demonstrate how to construct portfolios in such a way as to increase the likelihood of meeting an investment objective.

In this chapter, we set forth the framework for the investment management process. Regardless of the asset class being managed (i.e., stocks, bonds, or real estate), the investment management process follows the same integrated activities. John Maginn and Donald Tuttle define these activities as follows:

1. An investor’s objectives, preferences, and constraints are identified and specified to develop explicit investment policies;

2. Strategies are developed and implemented through the choice of optimal combinations of financial and real assets in the marketplace;

3. Market conditions, relative asset values, and the investor’s circumstances are monitored; and

4. Portfolio adjustments are made as appropriate to reflect significant change in any or all of the relevant variables.²⁵⁶

In this chapter, we will use the Maginn-Tuttle framework to describe ...