1、1Rich-Cheap and Relative Value TradingCopyright 1996-2006 Investment Analytics Copyright 1996-2006 Investment Analytics Rich-Cheap and Relative Value Trading Slide: 2Rich/Cheap Analysis & Relative Value Trading Principles of rich/cheap analysis Relative value concepts Total return analysisCopyright
2、1996-2006 Investment Analytics Rich-Cheap and Relative Value Trading Slide: 3Rich-Cheap Analysis Select the appropriate tax-rate Identify the tax-efficient bonds Estimate the spot tax-yield curve using the efficient bonds Identify the issues which are low yield (rich) or high yield (cheap) relative
3、to the curve Initiate duration-weighted tradeCopyright 1996-2006 Investment Analytics Rich-Cheap and Relative Value Trading Slide: 4Rich-Cheap Graphical AnalysisCheap IssueRich IssuesYieldMaturityCopyright 1996-2006 Investment Analytics Rich-Cheap and Relative Value Trading Slide: 5Problems with Sim
4、ple Approach Coupon Issues with different coupons trade at different yields Risk-Return Maturity is an inexact measure of risk Yield is an inexact measure of return Liquidity On-the-run vs off-the-run Issues on repo specialCopyright 1996-2006 Investment Analytics Rich-Cheap and Relative Value Tradin
5、g Slide: 6Example: Rich/Cheap Analysis Lab Simple Example: Worksheet-Rich Cheap Analysis Work out spot rates Two 2-year notes: 71/2% trading at par, 15% trading at 113.69 Market Yield Calculate YTM on both bonds, given market prices Theoretical Price/Yield Calculate theoretical price & yield on each
6、 note Conclusion: What is the relationship between coupon and yield?Copyright 1996-2006 Investment Analytics Rich-Cheap and Relative Value Trading Slide: 7Solution: Rich/Cheap Analysis Lab 7.5% 2-year Note:Market TheoreticalPrice Yield Price Yield100 7.5% 100.09 7.45% 15% 2-year Note:Market Theoreti
7、calPrice Yield Price Yield113.69 7.5% 113.87 7.41% Both issues are cheap, high coupon low couponCopyright 1996-2006 Investment Analytics Rich-Cheap and Relative Value Trading Slide: 8Impact of Coupon on Bond Value YTM calculation Makes simplifying assumption of constant reinvestment rate With rising
8、 spot rates: Low coupon bonds must trade at higher yields than high coupon bonds to compensateCopyright 1996-2006 Investment Analytics Rich-Cheap and Relative Value Trading Slide: 9Iso-Coupon Curves Implication To judge richness or cheapness of an issue must take account of coupon Coupon adjusted yi
9、eld Iso-Coupon Yield Curves Group bonds by coupon Plot YTM vs Maturity (duration) Assess value vs appropriate curveCopyright 1996-2006 Investment Analytics Rich-Cheap and Relative Value Trading Slide: 10Iso-Coupon Curves - Example5%6%7%0 5 10 15 20 25 30MaturityYield0% 5% 10% 15%Copyright 1996-2006
10、Investment Analytics Rich-Cheap and Relative Value Trading Slide: 11Bond Stripping & Repackaging Trading based on a variant of rich-cheap analysis Replicate the cash flows of inefficient bonds using the efficient bonds Stripping: Buy cheap bond & sell off the cash flows (as ZCBs) Repackaging: Sell r
11、ich bond & hedge with replicating cash flows from efficient bondsCopyright 1996-2006 Investment Analytics Rich-Cheap and Relative Value Trading Slide: 12Relative Value Concepts Yield curve as a measure of risk-return tradeoff Maturity as a proxy for risk Look at yield pickup on extension to identify
12、 value ExampleSettlement 2-May-95Maturity CouponClean PriceAcrrued InterestDirty Price YTMYield Pickup (bp)Modified Duration15-Feb-15 11 1/4 139 10/32 2.3619 141.6744 7.4255% 9.362815-Aug-15 10 5/8 133 4/32 2.2307 135.3557 7.4351% 0.96 9.563715-Nov-15 9 7/8 125 13/32 4.5829 129.9891 7.4412% 0.61 9.5
13、49115-Feb-16 9 1/4 118 27/32 1.9420 120.7857 7.4514% 1.02 9.906215-May-16 7 1/4 97 29/32 3.3646 101.2709 7.4482% -0.32 10.248715-Nov-16 7 1/2 100 18/32 3.4807 104.0432 7.4467% -0.14 10.278215-May-17 8 3/4 113 23/32 4.0608 117.7795 7.4706% 2.38 10.0543Copyright 1996-2006 Investment Analytics Rich-Che
14、ap and Relative Value Trading Slide: 13Yield vs. MaturityYIELD vs. MATURITY15-Feb-1515-Aug-1515-Nov-1515-May-1615-Nov-1615-Feb-1615-May-177.40%7.41%7.42%7.43%7.44%7.45%7.46%7.47%7.48%Dec-14 Jul-15 Jan-16 Aug-16 Mar-17 Sep-17Copyright 1996-2006 Investment Analytics Rich-Cheap and Relative Value Tradi
15、ng Slide: 14Yield Curve Analysis Fairly normal yield curve Yield on the 9 1/4 of Feb 16 looks to be a basis point too high 2.4bp pickup on the 8 /4% of May 17 indicates value in this sector Clear relationship between yield and tenor What about relationship between yield and risk? Use duration as a p
16、roxy for risk Plot yield vs. duration Makes relative values more distinctCopyright 1996-2006 Investment Analytics Rich-Cheap and Relative Value Trading Slide: 15Yield vs. DurationYIELD vs. DURATIONNov 16May 16May 17Feb 16Nov 15Aug 15Feb 157.42%7.43%7.43%7.44%7.44%7.45%7.45%7.46%7.46%7.47%7.47%7.48%9
17、.20 9.40 9.60 9.80 10.00 10.20 10.40Copyright 1996-2006 Investment Analytics Rich-Cheap and Relative Value Trading Slide: 16Yield Enhancement Swap Because it has higher coupon, the 8 3/4 of May 17 has lower duration than the 7 1/4 of May 16 or the 7 1/2 or Nov 16. By trading at slightly higher yield
18、, the market would appear to be underpricing it slightly Bond Swap:Action Maturity Coupon Price YTM DurationSell 15-Nov-16 7 1/2% 100 18/32 7.4467% 10.278Buy 15-May-17 8 3/4% 11323/32 7.4706% 10.054Copyright 1996-2006 Investment Analytics Rich-Cheap and Relative Value Trading Slide: 17Limitations to
19、 Traditional Yield Curve Analysis Yield curve: A primitive expression of risk/return tradeoff Drawbacks Maturity is poor indicator of bond price volatility YTM is not a measure of potential return For Buy and Hold investor, assumes coupons are reinvested at YTM For Active investor, assumes that if b
20、ond is sold prior to maturity, it is sold at same yield as on purchase dateCopyright 1996-2006 Investment Analytics Rich-Cheap and Relative Value Trading Slide: 18Total Return Holding Period Return (HPR) Measures bonds total return over given period HPR is a time-weighted average return HPR = ending
21、 market value + income receipts -1beginning market valueCopyright 1996-2006 Investment Analytics Rich-Cheap and Relative Value Trading Slide: 19HPR Example 7%, 30Yr T-Bond, priced at par to yield 7% 1-year HPR:($1000 + $35 + $35 + $1.23*) / $1000 -1 = HPR = 7.12%* $35 x 0.07 x 0.5 = $1.23Copyright 1
22、996-2006 Investment Analytics Rich-Cheap and Relative Value Trading Slide: 20HPR Example 7%, 30yr T-Bond, priced at par to yield 7% 1 Year HPR:Falling Constant RisingRates Rates Rates6% 7% 8%HPR 20.78% 7.12% -4.08%Copyright 1996-2006 Investment Analytics Rich-Cheap and Relative Value Trading Slide:
23、21Components of Total Return Price return (ending bond price - beginning bond price) Excluding accrued interest Coupon return Coupon receipts +/- accrued interest Reinvestment return Interest earned on reinvested couponsTotal Return = Price Return + Coupon Return+ Reinvestment ReturnCopyright 1996-2
24、006 Investment Analytics Rich-Cheap and Relative Value Trading Slide: 22Components of Total Return0%20%40%60%80%100%Short Term MediumTermLong TermPr ic eCouponReinvestmentCopyright 1996-2006 Investment Analytics Rich-Cheap and Relative Value Trading Slide: 23Realized Compound Yield)(Pr21RCYTFVice+=
25、RCY is a dollar-weighted average return FV is the future value of the bond investment over the holding periodCopyright 1996-2006 Investment Analytics Rich-Cheap and Relative Value Trading Slide: 24Reinvestment Rate and Realized Compound YieldReturn on 30-Year 10% Coupon BondRCYRRYTM0%5%10%15%20%0% 5
26、% 10% 15% 20%Reinvestment RateRealizedCompound YieldCopyright 1996-2006 Investment Analytics Rich-Cheap and Relative Value Trading Slide: 25Characteristics of Total Return Effect of reinvestment rate on total return Low vs. high coupon bonds Short vs. long maturity issues Holding period maturity Lab
27、: Total Return AnalysisCopyright 1996-2006 Investment Analytics Rich-Cheap and Relative Value Trading Slide: 26Total Return vs. Coupon10%Total Return6%0%Reinvestment RateCopyright 1996-2006 Investment Analytics Rich-Cheap and Relative Value Trading Slide: 27Total Return vs. HorizonTotal Return5 Year
28、6.23 Year10 yearReinvestment RateCopyright 1996-2006 Investment Analytics Rich-Cheap and Relative Value Trading Slide: 28Characteristics of Total Return -Summary Coupon RR has greater effect for higher coupon issues No effect for ZCBs Holding period For long holding periods Total return rises with R
29、R Reinvestment of coupon cash flows dominates return For short holding periods Total return falls with RR Bond price at horizon dominates return Greater RR implies lower price, hence return fallsCopyright 1996-2006 Investment Analytics Rich-Cheap and Relative Value Trading Slide: 29Immunized Portfol
30、ios and Total Return Portfolio with Horizon = Duration Coupon reinvestment effect balances price-discount effect Total return is approximately the same regardless of reinvestment rate Central concept of portfolio managementCopyright 1996-2006 Investment Analytics Rich-Cheap and Relative Value Trading Slide: 30Breakeven Reinvestment Rate RR at which TR on two bonds is the same over given horizon Used to decide which of two bonds is more attractive For some bonds, may not be a breakeven RR One bond totally dominates the other Total return is always greater