Investment Management with Python and Machine learning Specialization lecture Notes Part-IV

This article will cover week 4 of the course and for the previous parts, please refer here. This week we will cover liability-driven investing, PSP portfolio (Performance Seeking Portfolio), and GHP (Goal-Hedging Portfolio) or Liability Heding Portfolio.

Let’s start with the fundamental concepts of Present values, Liabilities, and Funding Ratio

• Present Value: How much are you willing to pay for an asset now given that you will be paid $1 after the maturity period (say 1 year)? You would certainly want to pay less than a dollar because you are waiting for 1 year. If the maturity period increases, then it will discount the present value more, as there is more uncertainty about getting the $1. In formal terms, it is the discounted value of all the future cash flows of an asset till the maturity period.
• Suppose you have a coupon-paying bond, which has a maturity period of 1 year, a principal amount of $1000 and it pays a coupon semi-annually of $30. The cash flow of the bond is, (i)After 6 months: $30, (ii)After a year: $30 + $1000 (principal amount). So how much are you willing to pay for this asset?

@Copyright EDHEC Business School
def bond_cash_flows(maturity,principal=1000,coupon_rate=0.03,coupons_per_year=12):
    '''
    Returns a series of cash flows generated by a bond
    indexed by a coupon number
    '''
    #number of coupons that you will get till maturity
    num_coupons…