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by Frank J. Fabozzi
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Chapter 16
Define what a funded investor is and the investment objective of a funded investor. Identify the major broad-based bond market indexes.
Explain what the economic surplus of an entity is and how its exposure to changes in interest rates is assessed.
Define what the duration of a liability is.
Investment Objectives
Specified in terms of return and risk Expressed quantitatively in terms of a benchmark - benchmark in terms of the investors liability structure - benchmark as a particular bond market index The benchmark should reflect the clients investment need from a risk, return, and cash flow perspective.
2) Institutional investors who must satisfy a liability structure but did not borrow the funds that created the liability (a pension sponsor)
Classification of Liabilities
Liability Type Amount of Outlay Timing of Cash Outlay Example
Type I
Type II Type III Type IV
known
known uncertain uncertain
known
uncertain known uncertain
Fixed-rate CD
Life insurance policy Floating-rate CD Auto (home) insurance policy
2) Specialized U.S. bond market indexes 3) Global and international bond market indexes
Risk
Performance risk the inability to satisfy an investment objective 1) Risk associated with managing relative to a bond market index 2) Risks associated with managing against a liability structure
Constraints
Client-imposed constraints should be realistic and consistent with the investment objective Constraints by the regulators of stateregulated institutions Tax implications