In partial fulfillment of INT 4300 - Internship
School of Business Administration
Bond Portfolio Management: Measures of profitability & risks
Dr. Ahmed Baijou
* Executive summary:
The scope of my internship was to be familiarized with the bond market and their measure of risk and performance and to know what are the tools used in the company to manage bond portfolios risks (Duration, convexity, sensitivity). However, these tools assume a parallel movement of the yield curve yet it happens that the yield curve changes in a form of a twist or a butterfly -these concepts will be explained later in the report-. So, as managing the risk of a portfolio I traced the evolution of the yield curve using a statistical tool named the Principal Component Analysis to see how frequently does the yield curve shift in parallel and if the duration, convexity, and sensitivity can be still used as managing risk of a bond portfolio. The results showed that the movement of the yield curve is frequently a parallel shift whereas the twist and the butterfly are very rare and that the calculated risk of the portfolio is not much affected. So I recommended running the PCA every six months just as a measure of precaution.
I wish to express my sincere thanks to those who helped me to undertake my study in an atmosphere of gathering knowledge, entertainment, and expertise. My first thanks go to Mr Hicham Reghay, Director General of the CDG Capital Management Group, which helped me in elaborating my project by providing me by the necessary information and giving me good advices. I also want to say that I am deeply grateful to my mentoring Dr. Ahmed Baijou who helped me by his valuable support and advice. Not to mention my parents and my sister who helped me during my internship with their encouragement. Finally, I want to say thank you to my friends Abderrezak Azizi and Fahd Heddach who helped make this internship a great experience.
Table of Contents
BONDS AND INTEREST RATES
Overview of obligations
The main types of obligation
Principle of discounting
Yield to maturity
Evaluation of the bond price
The term structure of interest rates
Spot rates and forward rates
Evaluation of the price of a bond with the yield to maturity
Evaluation of the price of a bond by the zero-coupon
PROFITABILITY AND RISK
"Total Return" and "Excess Return"
Conventional measures of interest rate risk
Sensitivity, Duration and Convexity
The limitations of these measures
Principal Component Analysis
Definition of the PCA
PCA applied to the yield curve
Results and analysis
Conclusion and Recommendations
. Founded in 1997, CDG CAPITAL Gestion, CDG CAPITAL subsidiary, is a company specialized in the management of mutual funds on behalf of others. Since then, CDG CAPITAL Gestion has developed expertise and know-how enabling it to offer a diversified range of investment vehicles and services tailored to the needs of an eclectic clientele. Thus, CDG CAPITAL Gestion offers a complete range of mutual funds covering all asset classes and different risk levels to tailor the investment profile to the clientele placements. CDG Capital Gestion manages assets of around 49 billion dirhams across a range of 54 mutual funds covering all asset classes. It is now a benchmark for asset management for third parties in Morocco. * CDG CAPITAL Gestion is known for its expertise developed through different types of management delegation: • Collective Management: Management of mutual funds open to the public;...
References: Phoa, Wesley, “Advanced Fixed Income Analytics,” Frank J. Fabozzi Associates, 1998.
Barber, Joel R., Mark L. Copper, “Immunization Using Principal Component Analysis,”
Journal of Portfolio Management, Fall 1996.
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