Pure Yield Pick Up Swap

PURE YIELD PICKUP SWAP

draw swops involve liquidating a current position and simultaneously buying a varied issue in its place with similar attributes but having a chance for improved returns. Pure support pickup swap is an active investment st straddlegy. These swaps are oriented toward exit improvements everyplace the long- enclosure, with little heed being paid to interim wrong movements in the market. The basic idea of this swap strategy is to step-up return by holding higher-yield bonds. When the yield curve is upward sloping, the pure yield pickup swap entails moving into longish - term higher-yield bonds. In this case, the investor is willing to accept higher by-line rate risk. The basic thrust is - earn an expected term premium in higher - yield bonds. EXAMPLE: tump over the following two bonds -

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Bond A yielding 8% and it is having 5-year maturity. (Presently held bond) Bond B yielding 8.85% and it is having a 10-year maturity.

If the investor is concerned entirely with the PURE YIELD, then Pure Yield Pickup swap will mean sell Bond A and demoralise B; thus bewilder higher yield. Also, the pure yield pickup swap can be executed by swapping out of low coupon bond into a equal into a comparable higher coupon bond to get in an automatic and instantaneous increase in current yield and yield to maturity.



The risks involved with pure yield pickup swaps are:

a) Market will move against trader. b) New issue whitethorn not be a viable swap candidate. c) change magnitude risk of call in the event interest rate decline. d) Reinvestment risk is greater with higher-coupon bonds.

Example:
Swap 1 Bond 1 - CG2032 8.3701% 7.95% 95.84 8.55% 95.84 7.95 0.17 95.91 104.03 8.3736% Bond 2 - CG2032 8.5500% 8.32% 97.7424 8.55% 97.74 8.32 0.18 97.78205907 106.28 8.5519%

Yield Coupon exp shuttingiture Reinvestment Rate Dollar Investment Coupon Interest on Coupon Principal Value at the Year end Total Accrued Realized Compound Yield

Capital red ink Improvement in Yield (in basis points)

1.90 17.82

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