Book contents
- Frontmatter
- Contents
- List of contributors
- Foreword
- Preface
- Acknowledgments
- Part I General overview
- Part II Models
- Part III Methodologies
- 10 Incorporating transaction costs in models for asset allocation
- 11 Bond portfolio analysis using integer programming
- 12 Scenario immunization
- 13 Mortgages and Markov chains: a simplified evaluation model
- 14 Parallel Monte Carlo simulation of mortgage-backed securities
- Index
11 - Bond portfolio analysis using integer programming
Published online by Cambridge University Press: 09 February 2010
- Frontmatter
- Contents
- List of contributors
- Foreword
- Preface
- Acknowledgments
- Part I General overview
- Part II Models
- Part III Methodologies
- 10 Incorporating transaction costs in models for asset allocation
- 11 Bond portfolio analysis using integer programming
- 12 Scenario immunization
- 13 Mortgages and Markov chains: a simplified evaluation model
- 14 Parallel Monte Carlo simulation of mortgage-backed securities
- Index
Summary
Introduction
The use of optimization techniques to design or modify bond portfolios is over twenty years old. The development of these techniques parallels the growth in computer power over the same time frame. Large-scale problems solved on the most powerful computers in the late 1960s may now be solved on run-of-the-mill mainframes and in some cases on personal computers. Bradley and Crane's paper (1972) provides a view of one of the first such models and reviews earlier published research. Hodges and Schaefer (1977) formulate a linear program (LP) that minimizes the cost of a portfolio while requiring that a series of cash outlays be met on time. Income taxes are assessed by multiplying coupons by the marginal tax rate. Alexander and Resnick (1985) formulate a linear goal program that maximizes the portfolio yield-to-maturity while immunizing the portfolio with a given duration and placing bounds on bond quality and on the mean absolute deviation of individual bond durations. More recently Ronn (1987) developed an LP approach which seeks to buy “underpriced” bonds and sell “overpriced” bonds while simultaneously considering taxes and bond portfolio cashflows. Leibowitz (1986a and b) presents a general overview of the issues involved in bond portfolio dedication and immunization procedures.
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- Information
- Financial Optimization , pp. 260 - 289Publisher: Cambridge University PressPrint publication year: 1993
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