CFA Level 3 Fixed Income

CFA Level 3 Fixed Income
Definitions
Fixed Income 1
Managing funds agains a liability using
ALM
Dedication Strategies
Immunization
Strategies
(Classical) SinglePeriod Immunization
Immunization for General Cash Flows
Cash Flow Matching Strategy
Contrasting an Immunization strategy to a
Cash Flow Matching strategy
Applying any dedication strategy, a PM is
concerned with:
Classes of Liabilities
Rebalance ratio
Managing Funds against a bond market
index
Classification of Fixed Income
Strategies
Passive Strategies
Indexing: Pure & Enhanced
Pure Bond Indexing (full replication)
Enhanced Indexing by small risk factors
Enhanced Indexing by matching primary
risk factors.
3 Techniques to align Risk Exposure with
Bond Index
Active Strategies
Active mgmt by larger risk factor
mismatches
Full Blown active management
Extra Activities required by active managers
Choosing a BM for AO or ALM approach
If choosing to go with an INDEX (passive)
approach
Benchmark selection: 4 characteristics
to match your INDEX fund against the
benchmark with.
In addition: Returns and Risk need to be
evaluated on after tax basis.
BB example of index benchmark selection
based on what is important to the investor.
Risk in Detail: Risk Profile
The BUMs problem
A cap weighted index is made up of highly
leveraged issuers which, as a result, run the
risk of being downgraded.
Fixed Income 2
Using Leverage to enhance returns
Using Derivatives to manage risks
associated with bond portfolio management
International Bond Investing
Relative Value Methodologies
39