Portfolio Management

CHAPTER 9Fixed-Income Management

Chapter Outline

• 9.1 Introduction
• 9.2 Fixed-Income Markets, Instruments, and Concepts
• 9.3 Fixed-Income Mandates
• 9.4 Passive Management
• 9.5 Active Management
• 9.6 Structured Portfolios
  • Summary
  • Problems
  • Endnotes

9.1 INTRODUCTION

Chapters 7 and 8 discussed the management of equity portfolios. More precisely, they dealt with portfolios consisting of a single type of instrument: common stock. This chapter is devoted to bonds, or more generally, fixed-income portfolios.

It is only a slight exaggeration to say that “fixed-income” encompasses almost all public securities that are not common stocks. Not long ago, say 50 years, the world of financial instruments was fairly simple. Common stocks represented ownership of corporations, entitling holders to a pro rata share of the profits once the company met all its obligations. Bonds entitled their holders to a stream of fixed periodic interest payments and a final repayment of principal at maturity. Preferred stock also promised periodic payments that had to be made before corporate earnings could be divided among common stock holders. Unlike bonds, however, preferred stocks were usually perpetual obligations—that is, they did not have a finite maturity. Because they promised fixed, periodic payments, bonds and preferred stock were called fixed-income.

With the advent of loan securitization, such as mortgage-backed securities (MBS) and derivatives-based structured products, the variety of fixed-income ...