How does cash flow matching affect a bond portfolio?

Expert Solution

Cash flow matching is a fixed income portfolio management strategy where you are trying to manage your liabilities. There are two ways you can do that, immunization strategy or Cash flow matching. Cash flow matching is where you are actually taking a bond portfolio of a certain maturity which is similar of the liability maturity in order to reduce the risk of default on liability. The way it works is you match the coupon and principal of a bond portfolio so that when the liabilities arise you can pay off them. This most of the time affects the bond portfolio is a positive way because it increases the reinvestment income for the bond portfolio. Every coupon that is received is reinvested at certain rate in order to match the total liability and the reinvestment income increases from the bond portfolio. It can also affect the bond portfolio in a negative way when in order to match the liability the bond is redeemed earlier and the markets are not favorable for the bonds

jeff jeffy answered 1 year ago

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How does cash flow matching affect a bond portfolio?

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