Question

Please describe the four bond investing strategies found there. If you are a risk-averse investor, which investing strategy would you pursue? Why?

Answer 1

The 4 strategies for bond investment are :

• Buy and Hold Strategy: The buy and hold strategy is where investors buy bonds with good investment grade score and good interest rates and hold the bonds until the maturity period is reached.
• Barbell strategy is formed when a Trader invests in Long and Short duration bonds, but does not invest in the intermediate duration bonds. This strategy is useful when interest rates are rising; as the short term maturities are rolled over they receive a higher interest rate, raising the value.
• A bullet strategy is formed when a trader invests in intermediate duration bonds, but does not invest in the Long and Short duration bonds.
• A bond ladder is an investment strategy whereby an investor staggers the maturity of the bonds in his/her portfolio so that the bond proceeds mature and can be reinvested at regular intervals.

A risk averse investor should adopt the strategy of a bond ladder.

Laddering requires buying and holding equal amounts of bonds that will mature over different periods. When the shortest bond matures, an equal amount of the bond with the longest maturity in the ladder is purchased. Many bond portfolio managers argue that laddering tends to outperform other bond strategies because it reduces both market price risk and reinvestment risk for a bond portfolio in the presence of interest rate uncertainty.