Zero-volatility spreads as an evaluative measurement to optimise fixed-income portfolio returns

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dc.contributor.advisor Prof. G. Els; Mr. N. Oberholzer en_US Nel, Gerrit 2012-06-05T07:11:41Z 2012-06-05T07:11:41Z 2012-06-05 2011-05-24
dc.description M. Comm. en_US
dc.description.abstract Fixed-income securities as an asset class form an integral part of investment portfolios. Turnover in the South African bond market during 2009 was R13.4 trillion. Normal coupon bonds are traded in the market on a yield-to-maturity basis, and the price of the bond is calculated using a formula based on the sum of all the present values of the future cash flows of the bond. The bond-pricing formula makes the assumption that coupons can be reinvested at the same yield as the current yield-tomaturity. If the investor invests the coupons at a different rate when coupons are paid out, the investor will realise a different yield on the investment. Interest rates are not static, but instead volatile, or change over time and maturity. The term structure of interest rates are of a dynamic nature and the slope of the yield curve changes as market forces impact on short-, medium- and long-term interest rates. The bond-pricing formula ignores the term structure of interest rate. Bonds with similar terms-to-maturity, trading at the same yield-to-maturity and different coupon rates, will produce different returns to investors because of the reinvestment of the coupons in the future. Zero-volatility spreads are calculated by determining the present value of each individual future cash flow of a bond at the relevant point on the yield curve. The sum of all these present values is then compared to the price of the bond. The zerovolatility spread will be equal to a fixed spread to the yield curve, and this will result in the present value of future cash flows at the yield curve and the bond price being equal to each other. Yield curves in this study are constructed as zero-coupon curves with money market, FRA and swap rates as inputs to the calculation thereof. Different methods of determining portfolio returns are investigated to enable the researcher to distinguish between the returns of two bond portfolios. Two portfolios with similar bonds with different zero-volatility spreads are compiled, and similarities in bond portfolios are tested with price value of a basis point, duration and convexity. The returns of these two portfolios are measured and compared over the period 30 September 2000 to 30 November 2009 in order to determine whether zero-volatility spreads as an evaluative tool can optimise bond portfolio returns. en_US
dc.language.iso en en_US
dc.subject Bond pricing en_US
dc.subject Zero-volatility spreads en_US
dc.subject Fixed-income securities en_US
dc.subject Investment portfolios en_US
dc.subject Investment returns en_US
dc.title Zero-volatility spreads as an evaluative measurement to optimise fixed-income portfolio returns en_US
dc.type Mini-Dissertation en_US

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