Question

. Pick one of the active bond management strategies that are discussed in the book and explain how it works. (5 pts.)

Answer 1

Active management looks for large positive active return and are willing to accept high active risk. One of the active bond strategy is interest rate anticipation swap. This strategy involves selecting bonds that will increse in value from an expected drop in interest rate. When a group of bond is sold to purchase another group in anticipation of change in interest rate is referred to as rate anticipation swap. If interest rates are going to drop then bonds with longer duration will be purchased, since they would profit the most from drop of interest rate and vice versa when rates increases. This strategy also requires the forecast of yield curve as well since the change in interest rates may not be parallel.