Portfolio and Other Considerations

A portfolio manager may want to liquidate a portfolio of bonds at a specified date, the horizon date, in the future. The portfolio manager would like to have a certain amount of confidence in the amount of money that would be received at this date. The portfolio manager can solve this problem if he or she can find and invest in either zero coupon bonds or bond strips of suitable quality that yield an appropriate amount and mature on the horizon date. The correct way to calculate the overall yield or duration of a bond portfolio is to calculate all the expected future cash flows of all the bonds in the portfolio and then calculate the internal rate. The standard redemption yield calculation assumes that all coupons are reinvested in the original bond as soon as they are received at the original redemption yield without any cost to the holder.