Maturity bucket

EXHIBIT 28.2 Market Value Distribution by Maturity Buckets... 

Portfolio convexity depends on the distribution of cash flows in the portfolio. A portfolio with an even distribution of cash flows has higher convexity than one where cash flows are concentrated in a particular maturity bucket, assuming equal duration and no optionality. By extension, considering a bond to be a portfolio of cash flows, the obvious conclusion is that bonds with higher coupons have higher convexity than bonds with low or zero coupons. 

Focusing on the term structure of the optimal portfolios, the portion of longer maturities increases when risk aversion is reduced. The aggressive investor with a 10-year horizon, for example, invests the whole capital in 10-year+ maturities, the averse one only 78% (rows 9 and 10, column 9). According to investment horizon, the 3-year risk averse portfolios consist of 52% short-term maturities in the 1-3-year area (row 3, column 6). The aggressive style, on the other hand, allocates only 26% to this maturity bucket (row 4, column 6). 

Traditionally quicklime was slaked on building sites in lime pits, dug into the soil. The resulting milk of lime was allowed to settle and mature for several days. The layer of lime water was removed and the putty was scooped out of the pit using a bucket. 

With the introduction of the credit element, a new dimension is added to the concept of the yield curve. It becomes imperative to look at the credit spread curve, that is, the spreads offered by instruments in various credit quality buckets over the maturity continuum on the horizontal axis with the associated spread associated with those ratings on the vertical axis, as shown in Exhibit 26.14. 

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