Question

Fundamentals of bond strategies require that bond managers assess the risk inherent in their bond portfolio so that they can structure optimal strategies to maximise the various objectives of their banks. In order to do this, they need to employ either passive and active bond strategies or both. Discuss each of the strategies highlighting the techniques used under each strategy bearing in mind the idea that no one single strategy/technique is optimal

Answer 1

Active Bond management strategies will be focusing at continuous realignment of the portfolio and shifting of the bond portfolio in order to maximize the rate of return through changing the maturity of the bonds due to change in the interest rates and monetary policies in an economy.

Passive Bond management strategy will be focused at maintaining a stability in the portfolio and holding bonds for the longer period of time without getting affected through any kind of change through monetary policies like Interest rate fluctuations.

Active Bond strategies will be including Bond swap, liquidation of one group of Bond for purchasing of another group of Bond, investment into bonds due to changes into the credit ratings of the bonds.

Passive management strategies for bonds will be including holding the bonds till the maturity, cash flow matching, Bond immunization etc.

so it can be said that there is a difference in the fundamental of both the strategies and they are effective accordingly in different market scenarios depending upon the nature of investor and changes in economic cycle.