In recent years, Korean bond market has been developed very rapidly. Because, its realized rate of return is competitive in compared to the amount of risk.
But, the bond strategies which are being used in Korean bond market are naive. Therefore, we formulate the bond strategies which can be used in bond market and test these strategies in Korean bond market.
In this paper, we first explain the concept of duration which will be the basis of the immunization stategy and introduce several other bond strategies. Second, we apply four important strategies to Korean bond market.
We evaluate the strategies in terms of risk side and return side. As far as the risk side is concerned, risk minimized immunization strategy generates return closer to the promised return than the other strategies. The immunization strategy and maturity matching strategy produce similar results. The "go long" strategy produces poor results as expected.
On the return side, "go long" strategy outperforms the other strategies which can be attributed to the decrease of interest rate. The duration matching strategy and maturity matching strategy produce relatively poor results.
The above analysis indicates that for investors with accurate information about interest rate, it would be desirable to select active strategy. But, it would be desirable to take risk minimized immunization strategy if he has no information or risk averse.