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Preparing a Bond Ladder (via Interactive Investor?)

Gilts, bonds, and interest-bearing shares
GoSeigen
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Re: Preparing a Bond Ladder (via Interactive Investor?)

#374205

Postby GoSeigen » January 7th, 2021, 10:18 am

Newroad wrote:As to why hold to maturity, my simplistic understanding is so that it becomes a consideration of the coupon(s) and taking capital loss (or gain) out of the equation. If one didn't do that, then why not say 3 or 7 years, rather than 5?



Newroad, my comments above were about the historical values posted by TJH.

The situation of gilts has changed now. I don't hold any and wouldn't propose that they're a good idea until there has been some adjustment in values. Personally I think cash is better in the current market environment for anyone who wants to mitigate some of the risk in their portfolios. Having gone leveraged long equities last March-June, I will in the future increasingly grow my cash allocation.

Is there anything specific you expect from gilts that you can't get from cash (without moving some way along the yield curve)?

GS

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Re: Preparing a Bond Ladder (via Interactive Investor?)

#374212

Postby tjh290633 » January 7th, 2021, 10:36 am

GoSeigen wrote:The 2013 gilt returned 4.5% CAGR. If you are calculating a real return you need to make that explicit.

P.S. Stupid question: What exactly is the difference between IRR and XIRR? The latter seems to be used commonly round here for some reason. Is IRR somehow inferior?

They are two Excel functions, IRR works for a fixed interval of time, like a year, whereas XIRR allows activity during the period of time. If you use IRR you have to adjust the result if you are working on periods of less than a year, like 6 months or 3 months. If you are working on monthly intervals, then you have to convert that to an annual figure by using the formula =(1+IRR(B3:B411,-0.01))^12-1 but for 3 monthly intervals you would use the 4th power. The formula for XIRR is =XIRR(B3:B411,A3:A411,0.2) for the same data. A3:A411 is the range of dates. The results are not quite the same by the two methods, so for my portfolio I get:

IRR: 9.24%
XIRR: 9.35%

The 2013 gilt was 4.5% coupon. I indicated that in the table. I happened to buy it at virtually par value for the purposes of the exercise.

TJH

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Re: Preparing a Bond Ladder (via Interactive Investor?)

#374231

Postby Newroad » January 7th, 2021, 10:55 am

Hi GS.

You ask

"Is there anything specific you expect from gilts that you can't get from cash (without moving some way along the yield curve)?"

We hold quite a lot of cash - I don't consider it for Portfolio purposes (other than because of it and the fact we've paid the mortgage off, I've bumped the "classic" 60/40 portfolio to 66/34 for the adults and 75/25 for the children in the family).

Whether it is right to hold bonds at all is a bigger question with a longer answer - which I don't know, but they still need appear to provide some diversification to me anecdotally. I also don't know whether my choice of which bond or bond funds/trusts is best, but I hope it's reasonable. In short, it is

    50% passive, investment grade global bonds (VAGP)
    50% active, mostly non-investment grade global bonds (one of CMHY, HDIV, IPE)

The point about the bond ladder though is about retirement - moving passive component from accumulation to draw-down in home currency.

Regards, Newroad

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Re: Preparing a Bond Ladder (via Interactive Investor?)

#374262

Postby GoSeigen » January 7th, 2021, 11:38 am

tjh290633 wrote:
The 2013 gilt was 4.5% coupon. I indicated that in the table. I happened to buy it at virtually par value for the purposes of the exercise.

TJH

Agreed, so the YTM was also 4.5%, but then your quoted 2013 return of 0.21% makes no sense. How did you arrive at that value?

EDIT: Never mind. I remember now: TJH has the absolutely inexplicable view that coupons don't matter in calculating the value and returns of bonds. (A view not held by any academic or professional bond expert I know of.) So his figures probably exclude income entirely. A fatuous exercise if you ask me, and frankly that sort of thing has no place on this particular board where we are supposed to be informing and educating about bond investing, not obfuscating the entire topic.

GS

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Re: Preparing a Bond Ladder (via Interactive Investor?)

#374326

Postby genou » January 7th, 2021, 1:53 pm

GoSeigen wrote:What exactly is the difference between IRR and XIRR? The latter seems to be used commonly round here for some reason. Is IRR somehow inferior?


IRR requires the cash flows to be periodic. XIRR allows irregular cash flows.

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Re: Preparing a Bond Ladder (via Interactive Investor?)

#374389

Postby tjh290633 » January 7th, 2021, 4:12 pm

GoSeigen wrote:Agreed, so the YTM was also 4.5%, but then your quoted 2013 return of 0.21% makes no sense. How did you arrive at that value?

EDIT: Never mind. I remember now: TJH has the absolutely inexplicable view that coupons don't matter in calculating the value and returns of bonds. (A view not held by any academic or professional bond expert I know of.) So his figures probably exclude income entirely. A fatuous exercise if you ask me, and frankly that sort of thing has no place on this particular board where we are supposed to be informing and educating about bond investing, not obfuscating the entire topic.


Here is the calculation of the cash flow for the first 5 years:

.             Capital      Interest   Cash flow    Int Increase   Yield
26/02/2008 (1,000.00) (1,000.00)
26/02/2009 (1,044.97) 44.97 (1,000.00)
25/02/2010 (1,089.56) 89.56 (1,000.00)
25/02/2011 (1,132.95) 132.95 (1,000.00)
28/02/2012 (1,170.60) 170.60 (1,000.00)
15/02/2013 4,798.34 232.28 5,030.62 4.84%

XIRR 0.2054%


As you will see, interest was taken into account.

TJH

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Re: Preparing a Bond Ladder (via Interactive Investor?)

#374609

Postby JohnW » January 8th, 2021, 6:38 am

I'm on board with this. Bond ladders have merits, regardless of low interest rates, so press on.
But confused, have I got this right? The plan is to buy nominal gilts maturing in about (from now) 10 years, 11 years, 12 years and subsequently up until you hit 65-ish years. Then as the first bunch of bonds matures at age 65 you buy another bunch maturing at age 75, then repeat each year to age 85-ish. Is that it?
So, the coupons don't get re-invested. They're used for living expenses; fine.
Firstly, the purpose was not clear to me, but presumably to provide predictable returns because the bonds are held to maturity. Fine.
What I don't quite understand is that because bond yields are low the coupons won't provide very much to live on unless the total value of the bonds is huge. Thus, if the coupons alone are insufficient to live on, then how and when is the principal being consumed?

Newroad wrote:At this point, the capital of the first gilt would be redeemed (with negligible risk - as sound as the UK Government) then reinvested in a new 10 Year gilt at the prevailing rate.

As I read the strategy, and tried to summarise it, above, no principal is withdrawn until at least age 85. Je ne comprend pas.
Secondly, if the principal were to be consumed along the journey to age 85, then surely one would buy less of the earlier maturing bonds and more of the later maturing bonds (in an attempt to even out the income) because during the later years after some bonds have been consumed there would be less coupon income than in the earlier years when more bonds were held.
Thirdly, three significant risks retiree investors face are longevity, inflation and sequence of returns. Wouldn't a bond ladder of inflation linked bonds make more sense that nominal bonds, or perhaps 50:50?

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Re: Preparing a Bond Ladder (via Interactive Investor?)

#374636

Postby Newroad » January 8th, 2021, 8:47 am

Hi JohnW.

Yes, the plan would be roughly as you outline, though not for 2-3 years or so (were I to pull the trigger on it at all).

That timeline also answers to some extent your question about returns - on balance, I would expect there to be some uplift in yields by then, so it would start being of use for living expenses. Equally, one could partially draw down on the principal if needed, before reinvesting (that is a decision I would propose to make at the time, subject to need and how other investments are going).

Finally, I would hope to pass a fair bit to my wife/children at the end, so the intent is not to run it down completely. Whilst by no means rich, I would expect to be fairly comfortable, so this is likely IMO.

Regards, Newroad

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Re: Preparing a Bond Ladder (via Interactive Investor?)

#374687

Postby GoSeigen » January 8th, 2021, 11:37 am

tjh290633 wrote:Here is the calculation of the cash flow for the first 5 years:

.             Capital      Interest   Cash flow    Int Increase   Yield
26/02/2008 (1,000.00) (1,000.00)
26/02/2009 (1,044.97) 44.97 (1,000.00)
25/02/2010 (1,089.56) 89.56 (1,000.00)
25/02/2011 (1,132.95) 132.95 (1,000.00)
28/02/2012 (1,170.60) 170.60 (1,000.00)
15/02/2013 4,798.34 232.28 5,030.62 4.84%

XIRR 0.2054%


As you will see, interest was taken into account.

TJH

Sorry, still can't see where the figure 4,798.34 is coming from? Is that supposed to be the total market value of the gilts held plus cash? If so the figure looks suspect. How is it sourced and calculated?

GS

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Re: Preparing a Bond Ladder (via Interactive Investor?)

#374718

Postby dealtn » January 8th, 2021, 12:28 pm

GoSeigen wrote:
tjh290633 wrote:Here is the calculation of the cash flow for the first 5 years:

.             Capital      Interest   Cash flow    Int Increase   Yield
26/02/2008 (1,000.00) (1,000.00)
26/02/2009 (1,044.97) 44.97 (1,000.00)
25/02/2010 (1,089.56) 89.56 (1,000.00)
25/02/2011 (1,132.95) 132.95 (1,000.00)
28/02/2012 (1,170.60) 170.60 (1,000.00)
15/02/2013 4,798.34 232.28 5,030.62 4.84%

XIRR 0.2054%


As you will see, interest was taken into account.

TJH

Sorry, still can't see where the figure 4,798.34 is coming from? Is that supposed to be the total market value of the gilts held plus cash? If so the figure looks suspect. How is it sourced and calculated?

GS


The calculation looks to be at portfolio level, not bond level.

So on 26/02/2008 £1,000 was invested in a gilt (the 4H13 from memory).

A year later a new 5 year Gilt was purchased, and a small amount of coupon from the 4H13 was received.

A year later and another Gilt purchased, and greater Coupon interest, now from 2 held Gilts had been received etc.

So the XIRR at the 5 year point isn't the XIRR on the first original bought 4H13 Gilt, which would have been around the YTM of 4.5%.

It can't be 100% accurate though as Gilt Coupons are semi-annual and don't occur on the end of February, but presumably this is only a minor error. It's not my portfolio and I am not going to extend the effort in calculating it properly (and without knowing the actual bonds, purchase prices etc. I can't do it anyway.)

That's my guess anyway.

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Re: Preparing a Bond Ladder (via Interactive Investor?)

#374820

Postby GoSeigen » January 8th, 2021, 4:11 pm

dealtn wrote:
GoSeigen wrote:
tjh290633 wrote:Here is the calculation of the cash flow for the first 5 years:

.             Capital      Interest   Cash flow    Int Increase   Yield
26/02/2008 (1,000.00) (1,000.00)
26/02/2009 (1,044.97) 44.97 (1,000.00)
25/02/2010 (1,089.56) 89.56 (1,000.00)
25/02/2011 (1,132.95) 132.95 (1,000.00)
28/02/2012 (1,170.60) 170.60 (1,000.00)
15/02/2013 4,798.34 232.28 5,030.62 4.84%

XIRR 0.2054%


As you will see, interest was taken into account.

TJH

Sorry, still can't see where the figure 4,798.34 is coming from? Is that supposed to be the total market value of the gilts held plus cash? If so the figure looks suspect. How is it sourced and calculated?

GS


The calculation looks to be at portfolio level, not bond level.

So on 26/02/2008 £1,000 was invested in a gilt (the 4H13 from memory).

A year later a new 5 year Gilt was purchased, and a small amount of coupon from the 4H13 was received.

A year later and another Gilt purchased, and greater Coupon interest, now from 2 held Gilts had been received etc.

So the XIRR at the 5 year point isn't the XIRR on the first original bought 4H13 Gilt, which would have been around the YTM of 4.5%.

It can't be 100% accurate though as Gilt Coupons are semi-annual and don't occur on the end of February, but presumably this is only a minor error. It's not my portfolio and I am not going to extend the effort in calculating it properly (and without knowing the actual bonds, purchase prices etc. I can't do it anyway.)

That's my guess anyway.


It's strange because yields were falling over that period AND they were sliding down the curve. My gilts performed spectacularly from 2007/8 onwards. at least four years with 30%+ returns from some of my gilts.

GS

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Re: Preparing a Bond Ladder (via Interactive Investor?)

#374838

Postby tjh290633 » January 8th, 2021, 4:39 pm

GoSeigen wrote:
tjh290633 wrote:Here is the calculation of the cash flow for the first 5 years:

.             Capital      Interest   Cash flow    Int Increase   Yield
26/02/2008 (1,000.00) (1,000.00)
26/02/2009 (1,044.97) 44.97 (1,000.00)
25/02/2010 (1,089.56) 89.56 (1,000.00)
25/02/2011 (1,132.95) 132.95 (1,000.00)
28/02/2012 (1,170.60) 170.60 (1,000.00)
15/02/2013 4,798.34 232.28 5,030.62 4.84%

XIRR 0.2054%


As you will see, interest was taken into account.

TJH

Sorry, still can't see where the figure 4,798.34 is coming from? Is that supposed to be the total market value of the gilts held plus cash? If so the figure looks suspect. How is it sourced and calculated?

It's strange because yields were falling over that period AND they were sliding down the curve. My gilts performed spectacularly from 2007/8 onwards. at least four years with 30%+ returns from some of my gilts.

GS

That was the value of the gilts at that date. The interest for that year from all five gilts is £232.28, that makes £5030.62 as the value of the portfolio at that date. To the interest from that year is added the proceeds of selling the first gilt to buy the next gilt, and so on as the ladder proceeds. At maturity there would be £1,000 from each gilt, unless sold before maturity because of a later date on the gilt. Some matured in March, some in September and one in August, so all were sold before maturity.

What were the gilts that you held over that period?

TJH

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Re: Preparing a Bond Ladder (via Interactive Investor?)

#374972

Postby GoSeigen » January 8th, 2021, 9:11 pm

tjh290633 wrote:
GoSeigen wrote:
tjh290633 wrote:Here is the calculation of the cash flow for the first 5 years:

.             Capital      Interest   Cash flow    Int Increase   Yield
26/02/2008 (1,000.00) (1,000.00)
26/02/2009 (1,044.97) 44.97 (1,000.00)
25/02/2010 (1,089.56) 89.56 (1,000.00)
25/02/2011 (1,132.95) 132.95 (1,000.00)
28/02/2012 (1,170.60) 170.60 (1,000.00)
15/02/2013 4,798.34 232.28 5,030.62 4.84%

XIRR 0.2054%


As you will see, interest was taken into account.

TJH

Sorry, still can't see where the figure 4,798.34 is coming from? Is that supposed to be the total market value of the gilts held plus cash? If so the figure looks suspect. How is it sourced and calculated?

It's strange because yields were falling over that period AND they were sliding down the curve. My gilts performed spectacularly from 2007/8 onwards. at least four years with 30%+ returns from some of my gilts.

GS

That was the value of the gilts at that date. The interest for that year from all five gilts is £232.28, that makes £5030.62 as the value of the portfolio at that date. To the interest from that year is added the proceeds of selling the first gilt to buy the next gilt, and so on as the ladder proceeds. At maturity there would be £1,000 from each gilt, unless sold before maturity because of a later date on the gilt. Some matured in March, some in September and one in August, so all were sold before maturity.

What were the gilts that you held over that period?

TJH


Hmm, something strange with those values. With prices from the DMO on 15 Feb 2013 (see below), I make the total capital value £5130.83 (dirty price). This gives an IRR of 2.35%.

Given 5yr yields were 0.9% at the time 2.35% CAGR for TJH's ladder looks about right to me.


My gilts were a mixture but included a variety of approx ten year maturity (betw 2018 and 2022) and then 2027s, 2055s, the 3.5% war bonds and the 2.5% consols. They were sold at least a few years before maturity, given the severe steepness of the yield curve (i.e. short gilts had negligible yield, long gilts much higher).

[EDITS: A few errors above fixed.]

GS

Prices of TJH bonds on 15 Feb 2013:
4½% Treasury Gilt 2013					102.238674
5% Treasury Stock 2014 109.485193
4¾% Treasury Stock 2015 113.271934
4% Treasury Gilt 2016 113.772155
8¾% Treasury Stock 2017 134.613560

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Re: Preparing a Bond Ladder (via Interactive Investor?)

#374996

Postby tjh290633 » January 8th, 2021, 11:23 pm

GoSeigen wrote:Prices of TJH bonds on 15 Feb 2013:
4½% Treasury Gilt 2013					102.238674
5% Treasury Stock 2014 109.485193
4¾% Treasury Stock 2015 113.271934
4% Treasury Gilt 2016 113.772155
8¾% Treasury Stock 2017 134.613560

I make the value with those prices £5052.66, but I know that I was using clean prices. The price for the 2013 stock is what I have in my calculations when sold, so we agree with that one.

TJH

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Re: Preparing a Bond Ladder (via Interactive Investor?)

#375016

Postby JohnW » January 9th, 2021, 5:23 am

Newroad wrote:Yes, the plan would be roughly as you outline, though not for 2-3 years or so (were I to pull the trigger on it at all).

Without wishing to suggest the idea is flawed, and enthusiastic to see innovative approaches, I don't see the appeal yet.
It ticks the boxes for having the duration and maturity just as you might want them, and perhaps cost, but for your anticipated use it seems unneeded.
But it misses out for convenience and some maturity diversification.
Nonetheless, it only needs to work for you, not in my mind, but have a read around to make sure you're on the right track.
https://www.bogleheads.org/wiki/Rolling ... bond_funds

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Re: Preparing a Bond Ladder (via Interactive Investor?)

#375022

Postby GoSeigen » January 9th, 2021, 8:07 am

tjh290633 wrote:
GoSeigen wrote:Prices of TJH bonds on 15 Feb 2013:
4½% Treasury Gilt 2013					102.238674
5% Treasury Stock 2014 109.485193
4¾% Treasury Stock 2015 113.271934
4% Treasury Gilt 2016 113.772155
8¾% Treasury Stock 2017 134.613560

I make the value with those prices £5052.66, but I know that I was using clean prices. The price for the 2013 stock is what I have in my calculations when sold, so we agree with that one.

TJH


If using clean prices you then have to add in the accrued interest, especially when coupons are some 3%-8% above yields!!!

Correction: I quoted the dirty-price Total earlier as 5130.83 but due to spreadsheet-operator error (or maybe copy/paste error) that figure should have been 5151.20. Sorry for the confusion.

To get a Total of 5151.20 for TJH's holdings on 15 Feb 2013, I took the sum of the above dirty prices multiplied by the nominal amounts purchased that TJH quoted earlier in the thread, viz:
tjh290633 wrote:
Date         Stock        Amount  
26/02/2008 4.5% 2013 999.30
26/02/2009 5% 2014 891.82
25/02/2010 4.75% 2015 913.41
25/02/2011 4.0% 2016 941.44
28/02/2012 8.75% 2017 704.87


Did I understand those nominal amounts correctly TJH?

Given 5-year yields were below 1% by 2013 I agree returns after that date would be paltry. That has never been in dispute.

GS

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Re: Preparing a Bond Ladder (via Interactive Investor?)

#375047

Postby dealtn » January 9th, 2021, 10:04 am

tjh290633 wrote:
GoSeigen wrote:Prices of TJH bonds on 15 Feb 2013:
4½% Treasury Gilt 2013					102.238674
5% Treasury Stock 2014 109.485193
4¾% Treasury Stock 2015 113.271934
4% Treasury Gilt 2016 113.772155
8¾% Treasury Stock 2017 134.613560

I make the value with those prices £5052.66, but I know that I was using clean prices. The price for the 2013 stock is what I have in my calculations when sold, so we agree with that one.

TJH


You buy and sell, and should therefore value, at dirty prices.

In your XIRR calculations for your equity portfolios how do you account for when a stock goes xd? Do you still count the dividend between the XD date (when the price drops) to the date it is paid, or is the dividend a "bonus" cash flow?

Gilts, and bonds generally, accrue the interest so in effect are (almost) permanently "cum-d". As has been said, back then, when interest rates, and coupons were meaningful, that makes a significant difference to your return, and any measure of it.

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Re: Preparing a Bond Ladder (via Interactive Investor?)

#375077

Postby tjh290633 » January 9th, 2021, 11:29 am

GoSeigen wrote:To get a Total of 5151.20 for TJH's holdings on 15 Feb 2013, I took the sum of the above dirty prices multiplied by the nominal amounts purchased that TJH quoted earlier in the thread, viz:
tjh290633 wrote:
Date         Stock        Amount  
26/02/2008 4.5% 2013 999.30
26/02/2009 5% 2014 891.82
25/02/2010 4.75% 2015 913.41
25/02/2011 4.0% 2016 941.44
28/02/2012 8.75% 2017 704.87


Did I understand those nominal amounts correctly TJH?

Given 5-year yields were below 1% by 2013 I agree returns after that date would be paltry. That has never been in dispute.

GS

Yes, those nominal amounts are correct.

TJH

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Re: Preparing a Bond Ladder (via Interactive Investor?)

#375083

Postby tjh290633 » January 9th, 2021, 11:37 am

dealtn wrote:You buy and sell, and should therefore value, at dirty prices.

In your XIRR calculations for your equity portfolios how do you account for when a stock goes xd? Do you still count the dividend between the XD date (when the price drops) to the date it is paid, or is the dividend a "bonus" cash flow?

Gilts, and bonds generally, accrue the interest so in effect are (almost) permanently "cum-d". As has been said, back then, when interest rates, and coupons were meaningful, that makes a significant difference to your return, and any measure of it.

I count the number of dividends received between purchase and sale. Those are accumulated annually and added to the sum available for the next purchase, after the exiting stock has been sold. They do not therefore leave the portfolio, and are disregarded in the cash flow, just as with an accumulation unit.

TJH

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Re: Preparing a Bond Ladder (via Interactive Investor?)

#375084

Postby dealtn » January 9th, 2021, 11:41 am

tjh290633 wrote:
dealtn wrote:You buy and sell, and should therefore value, at dirty prices.

In your XIRR calculations for your equity portfolios how do you account for when a stock goes xd? Do you still count the dividend between the XD date (when the price drops) to the date it is paid, or is the dividend a "bonus" cash flow?

Gilts, and bonds generally, accrue the interest so in effect are (almost) permanently "cum-d". As has been said, back then, when interest rates, and coupons were meaningful, that makes a significant difference to your return, and any measure of it.

I count the number of dividends received between purchase and sale. Those are accumulated annually and added to the sum available for the next purchase, after the exiting stock has been sold. They do not therefore leave the portfolio, and are disregarded in the cash flow, just as with an accumulation unit.

TJH


So am I right in thinking that if on the valuation date a stock was xd, the dividend wouldn't have been received yet, but the price you would be using is the xd price, the valuation of the dividend not yet received (but due to you in the future) isn't in your calculation?

That might be only a small "error" in an equity portfolio but the same effect in a bond one (particularly with high coupons) might be significant, in using clean and not dirty prices to capture it.


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