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Government Fixed Income Market Liquidity Trading

By Edited Apr 28, 2014 0 0

Government fixed income market liquidity trading is an opportunity to make extra income for anyone with idle cash. The main goal of any bond investor is to build a portfolio that suits a given level of liquidity and yield at minimum risk. This means that any person investing in government fixed securities should be informed of the risks involved. Investors need to be considerate of strategies that could be used to protect their investment against rising rates of interest.

Evaluating interest rate risks


Though there are several ways of evaluating risks associated with interest rates, one of the most vital metric to know is the duration. Duration may be measured in many ways, but the easiest is a distinct digit that measures time in, say years. This is a representation of the average time within which cash flow from a given government fixed security is received. Long term fixed income market securities have longer durations than short term ones; in addition, they are more susceptible to interest rate changes and riskier.

Strategies for controlling interest rate risks


Portfolio managers as well as individual investors may use certain strategies to control the duration of fixed-income securities to reduce the risk of interest rates. These strategies are:

Maturity: Laddering helps you build your portfolio with different maturity dates over a given period of time in the future. For instance, if you want to invest $ 1 million in bonds over 10 years, spread your portfolio so that you have securities worth $100,000 maturing every year. Once the first bond matures, use the proceeds to purchase a new bond so that your investment portfolio has 10 bonds at all times.

Coupon Rate: This involves focusing on premium coupon bonds. These have a lower risk on interest rates. An investor receives higher cash flows reducing the duration of the bond.

Coupon Type: Buying floating rate contrary to fixed rate securities allows for calculation of interest rates based on the variables in the market. This gives them a low duration making them less risky.

Optionality: A bond’s feature for the call option allows acceleration of its maturity date. This option makes the bond insensitive to interest rate changes cushioning it against risks associated with changes in interest rates.

These strategies will be helpful in maximizing income for anyone planning to get into government fixed income market liquidity trading. Maximizing your income secures, and protects your financial future.

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