Fixed Income and Alternative Investment Bond Portfolio: Project
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Project
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This assignment presents a comprehensive fixed income bond portfolio project designed for a pension fund with a 10-year liability duration and a $10 million investment. The project focuses on constructing a diversified portfolio using corporate, government, agency, and municipal bonds, adhering to specific allocation constraints. The analysis includes detailed examination of selected bonds, considering factors like coupon rates, maturity dates, modified duration, and credit ratings. The portfolio construction process involves allocating funds across different bond types to achieve a targeted return of 4.912%. The project also addresses the importance of interest rate risk management and diversification to meet the pension fund's objectives, with a focus on bonds less sensitive to interest rate changes. The final portfolio construction includes the allocation of funds to various corporate, government, agency, and municipal bonds, along with a return analysis. The project provides a detailed breakdown of bond characteristics and investment returns.
Running head: FIXED INCOME AND ALTERNATIVE INVESTMENT
Fixed Income
Name of the Student:
Name of the University:
Author’s Note:
Fixed Income
Name of the Student:
Name of the University:
Author’s Note:
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1BOND PORTFOLIO
Table of Contents
Introduction......................................................................................................................................2
Discussions......................................................................................................................................3
Bond Analysis..............................................................................................................................4
Portfolio Construction.................................................................................................................7
Conclusion.......................................................................................................................................9
Bibliography..................................................................................................................................10
Table of Contents
Introduction......................................................................................................................................2
Discussions......................................................................................................................................3
Bond Analysis..............................................................................................................................4
Portfolio Construction.................................................................................................................7
Conclusion.......................................................................................................................................9
Bibliography..................................................................................................................................10
2BOND PORTFOLIO
Introduction
The employee defined benefit pension plan would be set up by using the for a duration of
10 years, whereby the amount of pension fund for the company would be around $10 million and
the proceeds would be invested in the fixed income section whereby corporate, government,
agency and municipal bond would be the key broad classes where the investment will be done in
the portfolio. The investment in bonds that would be selected for the purpose of analysis will be
corporate, government, agency and municipal bonds that would be included in the portfolio. The
key investment criteria that has been placed for the purpose of investment will be that the fund is
expected to payout starting five-years from now. The other key investment criteria that has been
placed for the purpose of bond investment would be that the bond selected should be less volatile
or particularly should be less correlated with the interest rate movement1. The market condition
prevailing in the US Bond market has been predominately determined with the help of the
movement in the interest rate and the condition of the bond market. The Aggregate US Bond
Market in total has given a return of around 4.62% and the return generated by the major bond
markets and stock indices considered for comparison purposes are as follows:
Long-Term U.S Corporate Bond: 6.97%
Long-Term U.S Government Bonds: 6.78%
Investment Grade Corporate Bonds: 5.49%.
Barclays U.S. Aggregate Bond Index 4.62%.
It is accordingly important to determine the interest rate movement in the US market as it is
important to note that the interest rate and bond market is inversely correlated. Accordingly,
1 GmbH, finanzen.net. "BONDS | BOND MARKET | PRICES | RATES | Markets Insider."
markets.businessinsider.com. N. p., 2019. Web. 12 Oct. 2019.
Introduction
The employee defined benefit pension plan would be set up by using the for a duration of
10 years, whereby the amount of pension fund for the company would be around $10 million and
the proceeds would be invested in the fixed income section whereby corporate, government,
agency and municipal bond would be the key broad classes where the investment will be done in
the portfolio. The investment in bonds that would be selected for the purpose of analysis will be
corporate, government, agency and municipal bonds that would be included in the portfolio. The
key investment criteria that has been placed for the purpose of investment will be that the fund is
expected to payout starting five-years from now. The other key investment criteria that has been
placed for the purpose of bond investment would be that the bond selected should be less volatile
or particularly should be less correlated with the interest rate movement1. The market condition
prevailing in the US Bond market has been predominately determined with the help of the
movement in the interest rate and the condition of the bond market. The Aggregate US Bond
Market in total has given a return of around 4.62% and the return generated by the major bond
markets and stock indices considered for comparison purposes are as follows:
Long-Term U.S Corporate Bond: 6.97%
Long-Term U.S Government Bonds: 6.78%
Investment Grade Corporate Bonds: 5.49%.
Barclays U.S. Aggregate Bond Index 4.62%.
It is accordingly important to determine the interest rate movement in the US market as it is
important to note that the interest rate and bond market is inversely correlated. Accordingly,
1 GmbH, finanzen.net. "BONDS | BOND MARKET | PRICES | RATES | Markets Insider."
markets.businessinsider.com. N. p., 2019. Web. 12 Oct. 2019.
3BOND PORTFOLIO
when new bonds are issued in the market they typically carry coupon rates which are close or
linked to the prevailing market interest rates. Interest rates prevailing and the bond market in
the economy is comparatively have an inverse relationship so if one of the factor goes up the
other would go down. The interest rate movement in the US economy can be well shown
below whereby in the five year trend period interest rate particularly has increased to around
1.75%-2.00%. However, at the same time the Federal Reserve in the fed fund meet lowered
the target range it actually sets to be around 1.75%- 2.00%. The rate cut done by the Federal
Reserve is primarily due to the subdued inflation rate and the rising concerns towards the
economic outlook and ongoing trade war between US and China.
Discussions
The data analysis would be done for the bond market by evaluating the overall bond
market and the associated bonds that has been selected for the purpose of analysis. The total
when new bonds are issued in the market they typically carry coupon rates which are close or
linked to the prevailing market interest rates. Interest rates prevailing and the bond market in
the economy is comparatively have an inverse relationship so if one of the factor goes up the
other would go down. The interest rate movement in the US economy can be well shown
below whereby in the five year trend period interest rate particularly has increased to around
1.75%-2.00%. However, at the same time the Federal Reserve in the fed fund meet lowered
the target range it actually sets to be around 1.75%- 2.00%. The rate cut done by the Federal
Reserve is primarily due to the subdued inflation rate and the rising concerns towards the
economic outlook and ongoing trade war between US and China.
Discussions
The data analysis would be done for the bond market by evaluating the overall bond
market and the associated bonds that has been selected for the purpose of analysis. The total
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4BOND PORTFOLIO
investment that would be done in the US Government Bond would be around 40%, the total
investment in the US Corporate Bond would be around 25%. The total investment that would be
done in the Agency Bond would be around 25% and total investment in the Municipal Bond
would be around 10%. The total of $10 million would be invested in the allocated proportion of
weights that would be allowing the pension fund earn higher amount of returns.
Bond Analysis
The allocation of funds for investment in bonds will be well done with the help of the
allocation of investible $10 Million in the Government, Municipal, Agency and US Corporate
Bonds.
25%
40%
25%
10%
Bond Fund Allocation
US Corporate Bond
Government Bond
Agency Bond
Municipal Bond
U.S. Corporate Bond: The US Corporate Bonds that have been selected for the purpose of
analysis is the 21st Century FOX AM.06/35 and ABB FINANCE USA 12/42. The US Corporate
Bond 21st Century FOX AM.06/35 is issued by the Twenty First Century Fix Inc2. The coupon
paid by the company on the issued bond is around 6.40% and the associated price of the bond is
2 GmbH, finanzen.net. "21ST CENTURY FOX AMERICA INC.DL-NOTES 2006(06/35) Bond | Markets Insider."
markets.businessinsider.com. N. p., 2019. Web. 12 Oct. 2019.
investment that would be done in the US Government Bond would be around 40%, the total
investment in the US Corporate Bond would be around 25%. The total investment that would be
done in the Agency Bond would be around 25% and total investment in the Municipal Bond
would be around 10%. The total of $10 million would be invested in the allocated proportion of
weights that would be allowing the pension fund earn higher amount of returns.
Bond Analysis
The allocation of funds for investment in bonds will be well done with the help of the
allocation of investible $10 Million in the Government, Municipal, Agency and US Corporate
Bonds.
25%
40%
25%
10%
Bond Fund Allocation
US Corporate Bond
Government Bond
Agency Bond
Municipal Bond
U.S. Corporate Bond: The US Corporate Bonds that have been selected for the purpose of
analysis is the 21st Century FOX AM.06/35 and ABB FINANCE USA 12/42. The US Corporate
Bond 21st Century FOX AM.06/35 is issued by the Twenty First Century Fix Inc2. The coupon
paid by the company on the issued bond is around 6.40% and the associated price of the bond is
2 GmbH, finanzen.net. "21ST CENTURY FOX AMERICA INC.DL-NOTES 2006(06/35) Bond | Markets Insider."
markets.businessinsider.com. N. p., 2019. Web. 12 Oct. 2019.
5BOND PORTFOLIO
currently $136.03, however the accrued interest for the bond is around 2.062 making the dirty
price of the bond to be around $138.09. On the other hand, the bond ABB FINANCE USA 12/42
is issued by the ABB Finance (USA) Inc. that operates as a Special Purpose Entity. The
Company was formed in order to finance or issue the debt securities for repaying the credit
facilities and for various acquisition purpose. The Price of the bond is currently $111.30, the
associated coupon rate for the bond is 4.38%, the accrued interest rate for the bond was around
$1.8593 and the bond rating was A2.
US Corporate Bonds
Bond Name Price
Coupo
n Maturity
Modified
Duration Duration
Accrued
Interest
Bond
Rating
21st Century FOX AM.06/35 138.09 6.40% 12/15/2035 10.8456 11.0337 2.0622 Baa1
ABB FINANCE USA 12/42 111.30 4.38% 5/8/2042 14.8224 15.0578 1.8593 A2
Government Bonds: The Government Bonds that has been taken into consideration for the
purpose of portfolio construction is US Treasury 2038 and US Treasury 2032 that has been well
issued by the US Government. The bond issued by the US Government that is the US Treasury
2038 has a current price of 137.1, with a coupon of 4.38%, with a maturity of 2/15/2038. A
modified duration of 13.50 and a duration of 13.633. The accrued interest that was associated
with the bond is around 0.6776 and the credit rating of the bond is Aaa. On the other hand, the
US Treasury Bond 2032 has a current bond price of around $139.83, a coupon payment of 4.87%
and the associated accrued interest with the bond was around 1.6506. The bonds credit rating
was Aaa which was well given by Moody Rating Agency4.
Government Bonds
Bond Name Price Coupon Maturity Modified Duration Duration Accrued Interest Bond
3 GmbH, finanzen.net. "UNITED STATES OF AMERICADL-INFLATION-IND. BONDS 01(32) Bond | Markets
Insider." markets.businessinsider.com. N. p., 2019. Web. 12 Oct. 2019.
4 GmbH, finanzen.net. "UNITED STATES OF AMERICADL-NOTES 2008(38) Bond | Markets Insider."
markets.businessinsider.com. N. p., 2019. Web. 12 Oct. 2019.
currently $136.03, however the accrued interest for the bond is around 2.062 making the dirty
price of the bond to be around $138.09. On the other hand, the bond ABB FINANCE USA 12/42
is issued by the ABB Finance (USA) Inc. that operates as a Special Purpose Entity. The
Company was formed in order to finance or issue the debt securities for repaying the credit
facilities and for various acquisition purpose. The Price of the bond is currently $111.30, the
associated coupon rate for the bond is 4.38%, the accrued interest rate for the bond was around
$1.8593 and the bond rating was A2.
US Corporate Bonds
Bond Name Price
Coupo
n Maturity
Modified
Duration Duration
Accrued
Interest
Bond
Rating
21st Century FOX AM.06/35 138.09 6.40% 12/15/2035 10.8456 11.0337 2.0622 Baa1
ABB FINANCE USA 12/42 111.30 4.38% 5/8/2042 14.8224 15.0578 1.8593 A2
Government Bonds: The Government Bonds that has been taken into consideration for the
purpose of portfolio construction is US Treasury 2038 and US Treasury 2032 that has been well
issued by the US Government. The bond issued by the US Government that is the US Treasury
2038 has a current price of 137.1, with a coupon of 4.38%, with a maturity of 2/15/2038. A
modified duration of 13.50 and a duration of 13.633. The accrued interest that was associated
with the bond is around 0.6776 and the credit rating of the bond is Aaa. On the other hand, the
US Treasury Bond 2032 has a current bond price of around $139.83, a coupon payment of 4.87%
and the associated accrued interest with the bond was around 1.6506. The bonds credit rating
was Aaa which was well given by Moody Rating Agency4.
Government Bonds
Bond Name Price Coupon Maturity Modified Duration Duration Accrued Interest Bond
3 GmbH, finanzen.net. "UNITED STATES OF AMERICADL-INFLATION-IND. BONDS 01(32) Bond | Markets
Insider." markets.businessinsider.com. N. p., 2019. Web. 12 Oct. 2019.
4 GmbH, finanzen.net. "UNITED STATES OF AMERICADL-NOTES 2008(38) Bond | Markets Insider."
markets.businessinsider.com. N. p., 2019. Web. 12 Oct. 2019.
6BOND PORTFOLIO
Rating
US TREASURY 2038 137.71 4.38%
2/15/203
8 13.5038 13.6351 0.6776 Aaa
US TREASURY 2032 139.83 4.87%
4/15/203
2 0 0 1.6506 Aaa
Agency Bonds: The Agency Bonds that have been selected for the purpose of analysis is the
FED.NATL MTGE A. 99/21MTN and FED.NATL MTGE ASS. 99/29. The Federal National
Mortgage Association Obligation is the issuer for both the bonds5. The FED.NATL MTGE A.
99/21MTN price is currently 108.28, the coupon rate applicable for the bond is around 5.38%
and the maturity for the bond is 6/7/2021. The accrued interest that is associated with the bond is
$1.8554 and the rating of the bond is Aaa. On the other hand the FED.NATL MTGE ASS. 99/29,
the price of the bond is $141.76, the coupon rate for the bond is 6.25%, maturity of the bond is
on 5/4/2029. The accrued interest rate that is associated with the bond is 2.534 and the rating of
the bond is Aaa6.
Agency Bonds
Bond Name Price
Coupo
n Maturity
Modified
Duration
Duratio
n
Accrued
Interest
Bond
Rating
FED.NATL MTGE A. 99/21MTN
108.2
8 5.38% 6/7/2021 1.5602 1.5712 1.8554 Aaa
FED.NATL MTGE ASS. 99/29
141.7
6 6.25%
5/14/202
9 7.5327 7.5998 2.534 Aaa
Municipal Bonds: The bonds that have been selected for the purpose of analysis is the
MUNICIPAL.FIN. 2023 MTN and MUNICIPAL.FIN. 17/22 MTN. The price of the
MUNICIPAL.FIN. 2023 MTN Bond is around $104.02, the coupon rate for the bond has been
5 GmbH, finanzen.net. "FEDERAL NATIONAL MORTGAGE ASS.DL-BONDS 1999(29) Bond | Markets
Insider." markets.businessinsider.com. N. p., 2019. Web. 12 Oct. 2019.
6 GmbH, finanzen.net. "FEDERAL NATIONAL MORTGAGE ASS.LS-MEDIUM-TERM NOTES 1999(21) Bond |
Markets Insider." markets.businessinsider.com. N. p., 2019. Web. 12 Oct. 2019.
Rating
US TREASURY 2038 137.71 4.38%
2/15/203
8 13.5038 13.6351 0.6776 Aaa
US TREASURY 2032 139.83 4.87%
4/15/203
2 0 0 1.6506 Aaa
Agency Bonds: The Agency Bonds that have been selected for the purpose of analysis is the
FED.NATL MTGE A. 99/21MTN and FED.NATL MTGE ASS. 99/29. The Federal National
Mortgage Association Obligation is the issuer for both the bonds5. The FED.NATL MTGE A.
99/21MTN price is currently 108.28, the coupon rate applicable for the bond is around 5.38%
and the maturity for the bond is 6/7/2021. The accrued interest that is associated with the bond is
$1.8554 and the rating of the bond is Aaa. On the other hand the FED.NATL MTGE ASS. 99/29,
the price of the bond is $141.76, the coupon rate for the bond is 6.25%, maturity of the bond is
on 5/4/2029. The accrued interest rate that is associated with the bond is 2.534 and the rating of
the bond is Aaa6.
Agency Bonds
Bond Name Price
Coupo
n Maturity
Modified
Duration
Duratio
n
Accrued
Interest
Bond
Rating
FED.NATL MTGE A. 99/21MTN
108.2
8 5.38% 6/7/2021 1.5602 1.5712 1.8554 Aaa
FED.NATL MTGE ASS. 99/29
141.7
6 6.25%
5/14/202
9 7.5327 7.5998 2.534 Aaa
Municipal Bonds: The bonds that have been selected for the purpose of analysis is the
MUNICIPAL.FIN. 2023 MTN and MUNICIPAL.FIN. 17/22 MTN. The price of the
MUNICIPAL.FIN. 2023 MTN Bond is around $104.02, the coupon rate for the bond has been
5 GmbH, finanzen.net. "FEDERAL NATIONAL MORTGAGE ASS.DL-BONDS 1999(29) Bond | Markets
Insider." markets.businessinsider.com. N. p., 2019. Web. 12 Oct. 2019.
6 GmbH, finanzen.net. "FEDERAL NATIONAL MORTGAGE ASS.LS-MEDIUM-TERM NOTES 1999(21) Bond |
Markets Insider." markets.businessinsider.com. N. p., 2019. Web. 12 Oct. 2019.
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7BOND PORTFOLIO
around 2.88%, the maturity of the bond is in 3/7/2023, the modified duration for the bond has
been around 3.224 and the duration for the bond will be around 3.25257.
The accrued interest for the bond was around 0.2715 and the credit rating that was
assigned to the bond has been around Aa1. On the other hand, the price of the MUNICIPAL.FIN.
17/22 MTN bond price has been around $101.61, the associated coupon rate for the bond is
2.38%, the maturity of the bond has been 3/15/2022 and the associated credit rating that has been
assigned to the bond was around Aa1.
Municipal Bonds
Bond Name Price Coupon Maturity
Modified
Duration Duration
Accrued
Interest
Bond
Rating
MUNICIPAL.FIN. 2023 MTN 104.02 2.88% 3/7/2023 3.224 3.2524 0.2715 Aa1
MUNICIPAL.FIN. 17/22 MTN 101.61 2.38% 3/15/2022 2.3385 2.3591 0.1715 Aa1
Portfolio Construction
The portfolio construction for the bond will be well done with the help of the allocation
of investible $10 Million in the Government, Municipal, Agency and US Corporate Bonds. The
allocation and distribution of funds will be done accordingly in the four stated heads accordingly
as shown below and the return that would be generated by the Portfolio will be around 4.912%.
The return or the cash flows that the portfolio will be earning will be dependent on the coupon
payments that would be received by the portfolio investors (pension investors).
US Corporate Bonds
Bond Name Price
Weightag
e
Amount
Invested
Units
Purchased
Coupon (Cash
Flow) Return(%)
21st Century FOX AM.06/35 138.09 50% 1250000 9052 80000 3.200%
ABB FINANCE USA 12/42 111.30 50% 1250000 11231 54688 2.188%
Total 25% 2500000 134688 5.388%
7 GmbH, finanzen.net. "MUNICIPALITY FINANCE PLCDL-MED.-TERM NTS 2017(22)REG.S Bond | Markets
Insider." markets.businessinsider.com. N. p., 2019. Web. 12 Oct. 2019.
around 2.88%, the maturity of the bond is in 3/7/2023, the modified duration for the bond has
been around 3.224 and the duration for the bond will be around 3.25257.
The accrued interest for the bond was around 0.2715 and the credit rating that was
assigned to the bond has been around Aa1. On the other hand, the price of the MUNICIPAL.FIN.
17/22 MTN bond price has been around $101.61, the associated coupon rate for the bond is
2.38%, the maturity of the bond has been 3/15/2022 and the associated credit rating that has been
assigned to the bond was around Aa1.
Municipal Bonds
Bond Name Price Coupon Maturity
Modified
Duration Duration
Accrued
Interest
Bond
Rating
MUNICIPAL.FIN. 2023 MTN 104.02 2.88% 3/7/2023 3.224 3.2524 0.2715 Aa1
MUNICIPAL.FIN. 17/22 MTN 101.61 2.38% 3/15/2022 2.3385 2.3591 0.1715 Aa1
Portfolio Construction
The portfolio construction for the bond will be well done with the help of the allocation
of investible $10 Million in the Government, Municipal, Agency and US Corporate Bonds. The
allocation and distribution of funds will be done accordingly in the four stated heads accordingly
as shown below and the return that would be generated by the Portfolio will be around 4.912%.
The return or the cash flows that the portfolio will be earning will be dependent on the coupon
payments that would be received by the portfolio investors (pension investors).
US Corporate Bonds
Bond Name Price
Weightag
e
Amount
Invested
Units
Purchased
Coupon (Cash
Flow) Return(%)
21st Century FOX AM.06/35 138.09 50% 1250000 9052 80000 3.200%
ABB FINANCE USA 12/42 111.30 50% 1250000 11231 54688 2.188%
Total 25% 2500000 134688 5.388%
7 GmbH, finanzen.net. "MUNICIPALITY FINANCE PLCDL-MED.-TERM NTS 2017(22)REG.S Bond | Markets
Insider." markets.businessinsider.com. N. p., 2019. Web. 12 Oct. 2019.
8BOND PORTFOLIO
Government Bonds
Bond Name Price
Weightag
e
Amount
Invested
Units
Purchased
Coupon (Cash
Flow) Return(%)
US TREASURY 2038 137.71 50% 2000000 14524 87500 2.188%
US TREASURY 2032 139.83 50% 2000000 14303 97400 2.435%
Total 40% 4000000 184900 4.623%
Agency Bonds
Bond Name Price
Weightag
e
Amount
Invested
Units
Purchased
Coupon (Cash
Flow) Return(%)
FED.NATL MTGE A. 99/21MTN 108.28 50% 1250000 11545 67188 2.688%
FED.NATL MTGE ASS. 99/29 141.76 50% 1250000 8817 78125 3.125%
Total 25% 2500000 145313 5.813%
Municipal Bonds
Bond Name Price
Weightag
e
Amount
Invested
Units
Purchased
Coupon (Cash
Flow) Return(%)
MUNICIPAL.FIN. 2023 MTN 104.02 50.00% 500000 4807 14375 1.438%
MUNICIPAL.FIN. 17/22 MTN 101.61 50.00% 500000 4921 11875 1.188%
Total 10.00% 1000000 26250 2.625%
Portfolio Return
Bond Class Weight Return
US Corporate Bond 25% 5.388%
Government Bond 40% 4.623%
Agency Bond 25% 5.813%
Municipal Bond 10% 2.625%
Total 100% 4.912%
Government Bonds
Bond Name Price
Weightag
e
Amount
Invested
Units
Purchased
Coupon (Cash
Flow) Return(%)
US TREASURY 2038 137.71 50% 2000000 14524 87500 2.188%
US TREASURY 2032 139.83 50% 2000000 14303 97400 2.435%
Total 40% 4000000 184900 4.623%
Agency Bonds
Bond Name Price
Weightag
e
Amount
Invested
Units
Purchased
Coupon (Cash
Flow) Return(%)
FED.NATL MTGE A. 99/21MTN 108.28 50% 1250000 11545 67188 2.688%
FED.NATL MTGE ASS. 99/29 141.76 50% 1250000 8817 78125 3.125%
Total 25% 2500000 145313 5.813%
Municipal Bonds
Bond Name Price
Weightag
e
Amount
Invested
Units
Purchased
Coupon (Cash
Flow) Return(%)
MUNICIPAL.FIN. 2023 MTN 104.02 50.00% 500000 4807 14375 1.438%
MUNICIPAL.FIN. 17/22 MTN 101.61 50.00% 500000 4921 11875 1.188%
Total 10.00% 1000000 26250 2.625%
Portfolio Return
Bond Class Weight Return
US Corporate Bond 25% 5.388%
Government Bond 40% 4.623%
Agency Bond 25% 5.813%
Municipal Bond 10% 2.625%
Total 100% 4.912%
9BOND PORTFOLIO
29%
25%
32%
14%
Portfolio Return
US Corporate Bond
Government Bond
Agency Bond
Municipal Bond
Conclusion
The portfolio for bond was constructed with the help of four key asset class in which the
investment has been done by the Pension Fund Investors and that would be allowing the
investors to diversify their investment and earn a sound return from the portfolio. The key
interest rate risk measures such as duration has also been incorporated in the bond analysis so
that changes and effect in the interest rate upon the bond price could be well captured and
analysed.
29%
25%
32%
14%
Portfolio Return
US Corporate Bond
Government Bond
Agency Bond
Municipal Bond
Conclusion
The portfolio for bond was constructed with the help of four key asset class in which the
investment has been done by the Pension Fund Investors and that would be allowing the
investors to diversify their investment and earn a sound return from the portfolio. The key
interest rate risk measures such as duration has also been incorporated in the bond analysis so
that changes and effect in the interest rate upon the bond price could be well captured and
analysed.
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10BOND PORTFOLIO
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