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A Model for Bond Portfolio Improvement

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  • Hodges, S. D.
  • Schaefer, S. M.

Abstract

The problem of bond portfolio selection may be viewed as consisting of two parts. The first is concerned with the maturity profile of the total cash flows (the after-tax coupons and principal repayments) which the investor requires; in general there will be many portfolios of bonds which provide the desired cash flow profile. Accordingly, the second problem is the choice of a particular portfolio of bonds which provides these cash flows in some optimal fashion. If bonds are default free, future taxes are known, and differences in marketability and callability among issues can be ignored, then price is the only relevant criterion in choosing among alternative portfolios. This paper describes a simple linear programming model for this last problem of selecting the portfolio which provides a given pattern of cash flows at minimum cost. This provides a method for improving any initial portfolio, where such improvement is possible, by increasing its yield without reducing any future after-tax cash flows.

Suggested Citation

  • Hodges, S. D. & Schaefer, S. M., 1977. "A Model for Bond Portfolio Improvement," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(2), pages 243-260, June.
    • Handle: RePEc:cup:jfinqa:v:12:y:1977:i:02:p:243-260_02
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    Cited by:

    1. Livingston, Miles & Wu, Yanbin & Zhou, Lei, 2019. "The decline in idiosyncratic values of US Treasury securities," Journal of Banking & Finance, Elsevier, vol. 107(C), pages 1-1.
    2. Bühler, Wolfgang & Rasch, Steffen, 1995. "Einflußfaktoren auf Steuer-Klientel-Effekte," ZEW Discussion Papers 95-07, ZEW - Leibniz Centre for European Economic Research.
    3. Dmitry Kreptsev & Sergei Seleznev, 2017. "DSGE Model of the Russian Economy with the Banking Sector," Bank of Russia Working Paper Series wps27, Bank of Russia.
    4. John Board & Charles Sutcliffe & William T. Ziemba, 2003. "Applying Operations Research Techniques to Financial Markets," Interfaces, INFORMS, vol. 33(2), pages 12-24, April.
    5. Stefan Jaschke & Richard Stehle & Stephan Wernicke, 2000. "Arbitrage und die Gültigkeit des Barwertprinzips im Markt für Bundeswertpapiere," Schmalenbach Journal of Business Research, Springer, vol. 52(5), pages 440-468, August.
    6. Nasser Aedh Alreshidi & Mehdi Mrad & Ersoy Subasi & Munevver Mine Subasi, 2020. "Two-stage bond portfolio optimization and its application to Saudi Sukuk Market," Annals of Operations Research, Springer, vol. 288(1), pages 1-43, May.
    7. Stehle, Richard & Jaschke, Stefan R. & Wernicke, S., 1998. "Tax clientele effects in the German bond market," SFB 373 Discussion Papers 1998,11, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
    8. Michael Theobald & Peter Yallup, 2010. "Liability-driven investment: multiple liabilities and the question of the number of moments," The European Journal of Finance, Taylor & Francis Journals, vol. 16(5), pages 413-435.

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