Forming and managing a portfolio to accumulate the...

Forming and managing a portfolio to accumulate the required amount of money

Although the use of bonds in order to obtain a stream of stable incomes is quite effective, there are many individual and institutional investors trying to solve a completely different task by means of bonds - to accumulate the planned amount of money by the established moment of time. So, an individual investor can resort to such a measure, say, on the threshold of the coming retirement, to pay for future education of children in the university, to purchase an apartment, etc. At the same time, institutional investors such as pension funds, insurance companies can resort to such a way of accumulating the amounts necessary for future payments of pensions and insurance premiums. There are a number of ways to build portfolios that solve the problem of accumulating a given amount of money by the established date. The most common methods are:

a) prescribing the amounts received for specific mandatory payments;

b) Immunization of the portfolio.

Portfolio prescription is a strategy in which the investor's goal is to create a bond portfolio with a revenue structure (sequence and volumes) that completely or almost completely coincides with the structure of the forthcoming compulsory payments (for example, on June 28 the investor must pay 1.5 thousand rubles, August 15 -1.3 thousand rubles, etc.).

If the cash receipts (coupon payments plus denomination) from the bonds coincide exactly with the terms and amounts of future liabilities, then it is said about the pure coincidence of the cash flows. The simplest solution in this case (if the terms of payments are known in advance) is the purchase of zero-coupon bonds, the maturity of which coincides exactly with the terms of mandatory payments. Then there is no need to reinvest money, and portfolio management is greatly simplified.

However, in practice, it is difficult to implement the portfolio prescription method: first, the repayment time of zero-coupon bonds is often different from the time of mandatory payments. In these cases, it is necessary either to sell ahead of schedule the zero-coupon bond (if the obligatory payment is due before the bond is redeemed), or reinvest the par value received when redemption (if the bond is repaid earlier than the mandatory payment). Obviously, if there is a mismatch in the dates of compulsory payment and the payment of a zero-coupon bond, there is a significant risk - if the bond is sold early, it is dangerous to raise the interest rate (the selling price will fall), in case of reinvestment of the nominal, the interest rates fall off. Secondly, there are often no suitable zero-coupon bonds on the market, and the investor is forced to use coupon bonds. Then the investor also needs to resort to reinvestment of coupon amounts and denominations, so they talk about the coincidence of cash flows taking into account reinvestment. The bond portfolio is formed in such a way that cash receipts from bonds plus the expected return from reinvestment provide the necessary amounts for performing mandatory payments. The amount received as a result of reinvestment should be found using the calculation methodology for the cases of buying securities in terms that do not coincide with the terms of coupon payments.

The main advantage of the portfolio prescription method is minimizing the risk (liquidity and reinvestment), since the portfolio is formed with the minimum allowable deviations from the established payment schedule. But it also does not allow you to use all the potential opportunities for obtaining returns from bonds.

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