The Formation and Management of a Bond Portfolio

The paper is dedicated to the issues of bond portfolio formation and management from an individual investor's point of view. In terms of current economic conditions investors are extremely interested in buying bonds for their portfolios. This tool can be an alternative to banks deposits and stock market. At the same time, bonds are affected by interest risks which results in changes of bond portfolio value because of interest rates changes. Bonds are understandable - it provides investors with fixed coupones so that expected return can be calculated with high level of confidence. That is why bonds are not popular among scientists as a subject for their articles. The paper is of current interest because there are not many papers dedicated to this topic. The paper is concentrated on studying existing bond portfolio formation and management methods by modelling portfolios with the use of real financial data and by testing them on modelled interest rates changes. The aim of the work is to study existing bond portfolio formation and management methods in terms of possible interest risks from an individual investor's point of view. Parallel and non-parallel shifts of interest curve are taken into account. There are flat and real interst curves modelled for test. The study is aimed at testin unpopular interest risk measures such as Fisher-Weil duration. The results of the study revealed that this risk measure is effective for immunized bond portfolio formation. It also enables an investor to forecast expected changes in the portfolio value more accurate than famous Macaulay duration.