The Harvard Management Company and Inflation-Protected Bonds Essay

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The Harvard Management Company and Inflation-Protected Bonds 1(a) Regular Treasury bonds are purchased at face value in the beginning or an adjusted price prior maturity. And in every period, normally annul or semiannual, investor will receive a coupon as an interest and at the maturity a principal plus coupon. (b) Coupon and principal of the Regular Treasury bonds are fixed, therefore if the inflation rate increases in the forecasting future, investor will receive the same amount of coupon and principal with less real value and purchasing power. (c)TIPS are simultaneously related to change of inflation rate which means the principal and coupon will adjust instantly to change of inflation rate. TIPS like Regular Treasury bonds…show more content…
3 We can make a hedge portfolio by taking a long position in the inflation indexed TIPS and a short position in the regular bond with the same duration. We know that there are two variables affecting the bonds---real interest rate and actual inflation rate. When nominal interest rate changes, long and short positions of bonds in portfolio offset each other. When inflation rate changes, TIPS would change its price and leave regular bond in short position exposed to inflation risk. 4(a) Harvard’s Policy Portfolio is a portfolio within a group of asset classes including different instruments. It can be used as a benchmark to evaluate the performance of investment strategies. (b) To determine Policy Portfolio by using mean-variance analysis. Given a variable number of expected portfolio return, we would choose our strategy from a set of minimum-variance portfolio basing on our tolerance for risk. (c) Because one of HMS’s goal is to preserving the real value of endowment. Nominal return may reflect much lower real value of endowment because of inflation. So only the real return can make sure that Harvard does not lose money. (d)From exhibit4, domestic equity and foreign equity have a correlation of 0.5. It means there is a relatively big part of portfolios overlaps, which means equity and foreign equity may affect each other due to exposure to risks. 5Yes, TIPS should be considered as an additional asset class in Harvard’s Policy
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