Bond Portfolio Performance

By

Victor Marcos Hyslop

May 1, 2020

Finance 4315A

CRN: 26486

Executive Summary: This project is based on a 10 random outstanding bond containing portfolio. Data

for each basic bond is gathered from the FINRA webpage. The information retrieved is for 5 years and it

is measured on a 0.5 year-period basis. Then, the target values for duration and total portfolio value, 6.36

and $45,000,000 respectively are stated. Furthermore, the Excel’s Solver function is used over the bond

portfolio in order to perform a “rebalancing” process so the target values are resembled with the actual

values. Even though the actual values do not exactly match the target values, because a “tolerance”

parameter of 0.08 is used, the achieved values after the rebalance are well suited.

Word Count: 113

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1.0 Introduction:

For this project, the analyst has to figure the duration, the sensitivity, and the rebalancing of the

total portfolio which is composed of 10 different bonds. The bonds are all outstanding and have at

minimum 2 years left to maturity and a maximum of 8 years left to maturity. The info gathered for each

bond includes the coupon rate, the yield to maturity, duration, contribution to the total portfolio,

sensitivity and the rebalancing of the whole bond universe. The duration is calculated using the year-

period range from 0 to 5 years empirical data. From the same 0 to 5 years data, the contribution is also

calculated. For the sensitivity calculation the rate deviation is used to gather the results for the portfolio

value, maximum and minimum value, standard deviation, mean and range. For last, the rebalancing is

calculated in order to achieve an optimal value for the portfolio in the case of selling some bonds for the

portfolio to exactly achieving the target value of 45 million usd.

2.0 Data and Sample:

2.1 Data:

For this project, the portfolio is formed solely of debt securities, of bonds. Bonds are gathered

from 10 random companies and data for each and all of them is retrieved from the FINRA webpage. Data

for each bond includes the coupon rate, face value, yield to maturity, current trading price and maturity

date. These data elements are the base for all the calculations made in this project. The bond has 3

parameters, target duration which is of 6.36, Tolerance of 0.08 and Target value which is of

$45,000,000usd.

2.2 Sample Stocks:

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 The stock universe to use for the portfolio construction is not exposed to a single risk more than

another. The sample includes an Asian tech company, a retail store in the U.S., regional commercial

banks on opposite borders of the country, and other varied industries serving companies. 1) Innophos

Holdings, ticker symbol IPHS, is a producer of specialty ingredients with applications in food, health,

nutrition, and industrial markets. Its main revenue drivers are consumer and specialty chemical

manufacturers in the U.S., Mexico and Canada. 2) Dime Community Bancshares, Inc, DCOM ticker

symbol, is a regional commercial bank operating in New York. It provides a range of financial services

focusing on development and productive loans through its 29 retail banking offices. 3) Oracle

Corporation, ORCL ticker symbol, is a software development company based in California. Its business

focus is the development of IT business infrastructure. 4)NCR Corporation, NCR, provides software

services for a wide variety of industries ranging from the financial services industries, hospitality and

telecommunications in a worldwide set up. 5) Sierra Bancorp, ticker BSRR, regional retail commercial

bank based in California. Business operations with consumers and businesses, special focus on

agriculture. 6) BlackRock, Inc., BLK symbol. Leader publicly traded investment services company.

Material competitive with its use of alternative investments. 7) Semtech Corporation, ticker symbol

SMTC, semiconductor and advanced algorithms developer for optical data communications and video

transport products. Products used in industrial, medical and communications industries. 8) Asseco

Business Solutions SA, ABS is a Philippines based company. Its main business in providing of media and

entertainment services within Philippines. 9) Comtech Telecommunications Corp. CMTL. U.S. based

company that develops and markets tech solutions for telecommunications infrastructure in the United

States and Internationally. 10) Crocs, Inc., CROX ticker symbol. Develops, manufactures and retail sales

its product: Sandals and various culture footwear. The company has been shifting from retailing to e-

commerce in the recent years.

3.0 Results:

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3.1 Rebalancing:

Rebalancing a bond portfolio involves manipulating the weights for each bond within the

portfolio universe in order to achieve a desired value which can be a target money value, duration value

or even rate deviation value. In the specific case of this project, the objective of rebalancing is to achieve

the target portfolio value of 45,000,000 and a Duration equal or less than 4. Table 1 shoes the results for

the rebalancing process which are further described. In order to determine the optimal portfolio

rebalancing, the base, count trades, cost, contribution and duration for the whole universe of bonds within

the o to 5 years period is analyzed. Furthermore, the sensitivity, and rate deviation values are used to get

the bond count and eventually achieve the portfolio value for each bond. The Excel’s tool called Solver is

used in order to achieve the new rebalanced portfolio values. After running the Solver application, the

achieved value for “’contribution” (portfolio’s total value) is of $44,990,522. This contribution value is

concordant with the target as it is only $10 apart of getting the exact target value. Even though the

number achieved by the solver is not exactly the target value, the Solver function assures the user that the

resulting number is the closer one to the target. A constraint applied on the solver function code is that the

target duration is equal or less than 4. The result of the solver function for duration is of 4.07 which even

though is more than 4, is pretty close to the target and the solver function assures that the achieved value

is the optimal possible. The results for the rebalancing section of the project conclude satisfactorily

achieving the desired values.

TABLE 1
Change 2.36 Target Duration 4 Tolerance 0.08 Target Value $45,000,000 Tolerance $ 10,000.00

Old New
Bond Contribution Contribution New Price Duration Base Count Trades Cost Contribution Duration
1 CINF.GB $1,540.11 $1,349.99 $1,139.42 4.72324123 1277 1276 -1 $1,139.42 $1,965,177.70 0.2063103
2 CSGS4474564 $1,176.17 $1,072.46 $1,049.63 1.6320767 4287 4286 -1 $1,049.63 $5,041,047.91 0.18286911
3 PNM4276391 $1,206.37 $1,110.45 $1,066.10 2.68679019 9572 9572 0 $0.00 $11,547,365.88 0.68959745
4 ROP4435340 $1,262.50 $1,161.28 $1,050.48 3.88081206 3297 3296 -1 $1,050.48 $4,161,198.27 0.35893845
5 HLT4827495 $1,355.52 $1,199.69 $981.76 3.23248942 300 300 0 $0.00 $406,657.25 0.0292176
6 PPL3705475 $1,595.18 $1,377.42 $1,100.84 5.06930449 300 299 -1 $1,100.84 $476,957.76 0.05374119
7 SNV4558290 $1,078.30 $1,002.18 $999.97 0.06944444 300 2355 2055 ($2,054,934.29) $2,382,964.06 0.00367819
8 MSCI4908222 $1,298.28 $1,186.61 $1,021.10 6.18238801 13734 12331 -1403 $1,432,601.76 $16,009,080.60 2.19989328
9 BPOP.HE $1,507.29 $1,293.94 $999.48 8.42505976 300 0 -300 $299,843.97 $0.00 0
10 BBY4720674 $1,330.84 $1,205.45 $1,030.54 5.33484529 2103 2270 167 ($172,099.92) $3,000,072.97 0.35573993
3929 ($490,248.12) $44,990,522.39 4.0799855

3.2 Duration and Duration Plot:

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 The duration is a concept that applies to debt securities and measures the sensitivity of a bond’s

price against changes in the base interest rate that the central bank imposes over the debt securities within

the country of the central bank’s operations. The duration value is exactly the time period in time in

which the risk of price changes and change in interest rates offset each other for the bond in question. The

duration plot measures the portfolio’s duration over the range of 0 to 5 years-period in 0.5 year-periods.

Figure 1 shows the duration plot for the portfolio being the orange line the target duration while the blue

line is the actual portfolio duration. The trend shows that as time passes by, the actual duration more

resembles the target duration. Based on the trend, I can conclude that even though the trend could be even

better, the duration is well targeted.

3.3 Sensitivity Plot

The sensitivity plot shows the relationship between the portfolio value and the rate deviation.

Figure 2 shows the trend in which is demonstrated that the lower the rate deviation value is, the higher

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the portfolio value. The trend suggests a negative correlation between the two parameters. The plot shows

that the optimal value for rate deviation in order to achieve the closest to target portfolio value is negative

(-)1%. The trend is consistent with the expected so I conclude that this part of the project finished

satisfactorily.

3.4 Portfolio Performance:

After analyzing all the gathered data, values for: price contribution, duration, count, cost and Herf

index are calculated. Table 2 shows the results for all the resulting values. Total Herf index is 0.25,

duration is 6.2801, contribution is $45,008,984 and cost shows a negative $38,514,200 value. Both the

target duration and target portfolio value are achieved as the actual values for those parameters are within

the tolerance constraint for the target values.

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 TABLE 2
Target Duration 6.36 Tolerance 0.08 Target Value $45,000,000 Tolerance $10,000
Bond Price Contribution Duration Count Cost Contribution Herf Duration
1 CINF.GB ($1,261.53) $1,540.11 6.4611995 1277 ($1,610,969.27) $1,966,717.81 4.37% 0.2823
2 CSGS4474564 ($1,117.08) $1,176.17 3.7157008 4287 ($4,788,931.36) $5,042,224.07 11.20% 0.4163
3 PNM4276391 ($1,119.37) $1,206.37 4.7183575 9572 ($10,714,590.80) $11,547,365.88 25.66% 1.2105
4 ROP4435340 ($1,080.21) $1,262.50 5.7974125 3297 ($3,561,440.27) $4,162,460.77 9.25% 0.5361
5 HLT4827495 ($971.56) $1,355.52 5.151967 300 ($291,467.92) $406,657.25 0.90% 0.0465
6 PPL3705475 ($1,195.48) $1,595.18 6.5085009 300 ($358,643.47) $478,552.93 1.06% 0.0692
7 SNV4558290 ($998.93) $1,078.30 2.3492021 300 ($299,679.67) $323,490.35 0.72% 0.0169
8 MSCI4908222 ($1,045.69) $1,298.28 8.0001269 13734 ($14,361,530.92) $17,830,566.30 39.62% 3.1693
9 BPOP.HE ($998.62) $1,507.29 9.3601164 300 ($299,586.89) $452,186.24 1.00% 0.0940
10 BBY4720674 ($1,059.13) $1,330.84 7.0570548 2103 ($2,227,359.61) $2,798,762.80 6.22% 0.4388
($38,514,200.18) $45,008,984.40 0.2500 6.2801

4.0 Conclusion:

The project demonstrates that by using the art of rebalancing, every different combination of

random bonds can be adjusted in order to achieve a target value for the duration and portfolio value

parameters. This project also emphasizes the importance of the Excel’s Solver function and how valuable

it is on rebalancing among other different tasks. Also, the project shows that the rebalancing process takes

time. This phenomenon is demonstrated on Figure 1 and Figure 2 in where there is a clear trend of the

actual value to match with the target value after the rebalancing process is done as the time goes by. In the

case of this project, 5 years were not totally enough to achieve that the actual parameters matched the

target values. Furthermore, the project taught myself something that I did not use in the past which is the

usage of tolerance values. Tolerance values are very useful in that they enable the solver to operate more

optimal way if the user is conscious about the proper tolerance value to use on the project.

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5.0 Appendix:

Bond Data Gathered

Start Date Terminal Date Nper Duration Today

5/28/2020 10/5/2026 12.72 6.36 4/28/2020

Periods Till Forecast Forecast Value of Contribution

Maturity Maturity From Forecast Forecast Price Value Interest Payments to Portfolio Bond
Ticker Company Coupon Face Value YTM Last Prd Trd Dy Date Start Date Periods at Start Date Terminal Date Terminal Date Value Duration
CINF.GB CINF 6.900% 1000 3.162% $1,263.60 4/28/2020 5/15/2028 15.93972603 12.72 ($1,261.53) $1,058.22 $481.88 $1,540.11 6.461199
CSGS4474564 CSGS 4.250% 1000 1.276% $1,055.00 4/27/2020 6/15/2024 8.104109589 8.1041096 ($1,117.08) $1,000.00 $176.17 $1,176.17 3.715701
PNM4276391 PNM 3.850% 1000 1.450% $1,115.40 4/28/2020 8/1/2025 10.36164384 10.361644 ($1,119.37) $1,000.00 $206.37 $1,206.37 4.718357
ROP4435340 ROP 3.800% 1000 2.467% $1,078.20 4/28/2020 12/15/2026 13.10684932 12.72 ($1,080.21) $1,002.56 $259.94 $1,262.50 5.797413
HLT4827495 HLT 5.125% 1000 5.697% $971.20 4/28/2020 5/1/2026 11.85753425 11.857534 ($971.56) $1,000.00 $355.52 $1,355.52 5.151967
PPL3705475 PPL 7.375% 1000 4.587% $1,236.30 3/2/2020 12/15/2028 17.11232877 12.72 ($1,195.48) $1,057.62 $537.56 $1,595.18 6.508501
SNV4558290 SNV 3.125% 1000 3.171% $998.90 4/28/2020 11/1/2022 4.860273973 4.860274 ($998.93) $1,000.00 $78.30 $1,078.30 2.349202
MSCI4908222 MSCI 4.000% 1000 3.431% $1,037.50 4/28/2020 11/15/2029 18.94794521 12.72 ($1,045.69) $1,016.67 $281.61 $1,298.28 8.000127
BPOP.HE BPOP 6.564% 1000 6.579% $998.50 1/17/2020 9/15/2034 28.61917808 12.72 ($998.62) $999.08 $508.20 $1,507.29 9.360116
BBY4720674 BBY 4.450% 1000 3.623% $1,058.10 4/27/2020 10/1/2028 16.70136986 12.72 ($1,059.13) $1,015.75 $315.10 $1,330.84 7.057055

Bond Duration
Target
Years Duration CINF CSGS PNM ROP HLT PPL SNV MSCI BPOP BBY
5 5 6.461199 3.715701 4.718357 5.797413 5.151967 6.508501 2.349202 8.000127 9.360116 7.057055
4.5 4.5 6.132565 3.291133 4.302327 5.404166 4.781972 6.213533 1.88485 7.650091 9.163521 6.703971
4 4 5.785456 2.848052 3.868629 4.993288 4.390732 5.899697 1.402033 7.282407 8.949162 6.332621
3.5 3.5 5.441736 2.408348 3.439241 4.586822 4.000241 5.588882 0.922862 6.919149 8.739043 5.96504
3 3 5.078797 1.949446 2.991682 4.162358 3.588045 5.258508 0.425 6.537944 8.510716 5.578811
2.5 2.5 4.718444 1.493188 2.547901 3.741923 3.176133 4.930416 0 6.160856 8.286171 5.195956
2 2 4.338006 1.01695 2.08539 3.303093 2.742045 4.581973 0 5.765503 8.042944 4.794045
1.5 1.5 3.959217 0.542522 1.626065 2.867878 2.307767 4.234965 0 5.373941 7.80301 4.395085
1 1 3.562104 0.05 1.150159 2.416614 1.853611 3.869476 0 4.966553 7.546667 3.979406
0.5 0.5 3.162761 0 0.673999 1.965735 1.396003 3.501665 0 4.559831 7.290317 3.563442
0 0 2.741119 0 0.177778 1.495558 0.915251 3.111545 0 4.134148 7.014241 3.127509

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 Duration Contribution
Port Duration
CINF CSGS PNM ROP HLT PPL SNV MSCI BPOP BBY 6.280054533
0.282329 0.416259 1.210527 0.536149 0.046548 0.069201 0.016884 3.169296 0.094037 0.438824 5.902612391
0.267969 0.368696 1.103792 0.499781 0.043205 0.066065 0.013547 3.030627 0.092062 0.416868 5.507294598
0.252802 0.319059 0.992524 0.461783 0.03967 0.062728 0.010077 2.884967 0.089908 0.393777
5.116112403
0.237783 0.2698 0.882361 0.424192 0.036142 0.059423 0.006633 2.74106 0.087797 0.37092
4.706622322
0.221924 0.218391 0.767537 0.384938 0.032418 0.05591 0.003055 2.590044 0.085504 0.346903
4.301313428
0.206178 0.167277 0.653682 0.346056 0.028696 0.052422 0 2.440658 0.083248 0.323097
0.189554 0.113926 0.535021 0.305472 0.024774 0.048717 0 2.284037 0.080804 0.298105 3.880410918
0.173002 0.060777 0.417178 0.265223 0.020851 0.045028 0 2.128917 0.078394 0.273297 3.462666907
0.15565 0.005601 0.295081 0.22349 0.016747 0.041142 0 1.967528 0.075818 0.247449 3.028507344
0.1382 0 0.172919 0.181792 0.012613 0.037231 0 1.806403 0.073243 0.221583 2.643984991
0.119776 0 0.04561 0.13831 0.008269 0.033083 0 1.637766 0.070469 0.194476 2.247760099

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