 There are two sources of potential value in active bond management. The first is the interest rate forecasting in which the movement across the overall bond universe is anticipated in terms of interest rate changes. And the second source is the identification of mispricing in the bond market. For example, an analyst may believe that there exists a larger default premium on any given bond. So, the analyst may believe that the bond is mispriced. These two strategies can earn abnormal return for the bond portfolio managers. But earning this abnormal return is subject to the availability of superior information with the analyst than the other market players. Mayor knowledge of prices reflecting any information is of no use for the bond portfolio manager. This means that by valuable information means the differential information that will make difference for the bond portfolio manager to earn the abnormal profit. But the notable point is that the interest rate forecasters have notoriously poor track record in this record. Taxonomy of active bond portfolio strategies. This taxonomy had been coined by Homer and Lee Bovitz. They see that portfolio rebalancing activities are one of the four types of the bond swaps. The investors believe yield relationship between a particular bonds or the sectors temporarily out of alignment. The elimination of this anomaly can ensure gain to relies on the underpriced bonds. Realignment period is also called as the workout period. The first of the four swaps taxonomy is the substitution swap. In this scenario, it is an exchange of one bond for an identical substitute. Now that substitute should offer the equal open rate, maturity, quality, call features, sinking fund provisions and the other attributes of the bonds. Now what motivates the bond holder on this type of swaps? First, a belief that the market has temporarily mispricing in the two bonds. The second motivation is that the discrepancy between the bonds prices represents a profit opportunity for the bond portfolio manager. The second type is the intermarket spread swap. It pursues an investor to believe that the yield spread between two sectors of the bond market is temporarily out of the line. For example, if current spread between corporate and government bonds is expected to narrow, then the investor will shift from the government bonds into the corporate bonds. And if it really happens, then the corporate bonds will outperform the government bonds. Now to enjoy this benefit, there should be a good reason to believe that the yield spread seemed to be out of the alignment. Third type of swap is the rate anticipation swap. It is in fact pegged to interest rate forecasting and for the rates expected to fall, the investor will swap into the bonds of longer duration. And where the rates are expected to rise, investor will swap into shorter duration bonds. For example, an investor might sell a five-year maturity treasury bonds replacing it with a 25-year maturity treasury bonds if he forecast any change in the interest rate in the days to come. Next, we have pure yield pickup swap. It is a mean of increasing return by holding higher yield bonds. And for upward sloping yield curve, the yield pickup swap entails moving into longer term bonds. Investors swapping the shorter term bond for the longer period bond will earn a higher rate of return as long as the yield curve does not shift up during the holding period. This means that if it happens, then the longer duration bond will suffer a greater capital loss. Next, we have horizon analysis. Horizon analysis is a way to forecast interest rate where a particular holding period is selected and yield curve is predicted at the end of the period. Now, given a bond's maturity time at the end of the holding period, its yield can be read from the predicted yield curve where at the end of the period price can be calculated. So, at this stage, we need to have determined any given bonds maturity time at the end of the holding period. Then we can derive its yield curve and from this predicted yield curve, the end of the period price can be calculated. Coupon income and potential capital gain of the bonds are then summed up to find the bonds total return over the holding period. So, once we have determined the price and yield, then in the next phase, we can add up the coupon income and the potential capital gain on the coupon so that we can determine the total return on this particular bond over its life. To determine horizon analysis, there is an example where a 10-20 year bond currently sells at a YTM of 9%. A portfolio manager with a two-year horizon needs to forecast the bond's total return over the coming two years. This means that in two years, the bond will have an 18-year maturity. An analyst forecast that two years from now, 18 years bond will sell at YTM of 8% and coupons can be reinvested in short-term securities over the coming two years at 7%. Now, to determine the overall return, first we need to determine the current price and to determine current price, we need to determine the present value of the coupon interest and the present value of the phase value. And that present value will be determined using the discount rate of 9%. Now, to determine the future value from now, we need to use the 8% rate in the similar way as we have done to determine the current price. In similar way, we need to determine the future value of the reinvested coupon. And as we have seen that it is the 7% reinvestment rate. So, we have determined the future value of the reinvested coupons for two years, that is 207. Now, we have current price which is 1091.29. We have future price that is 1197.44. Also, we have future value of the reinvested coupons that is 207. Now, to determine the two years return, first we need to determine the capital gain. Now, to determine capital gain, we need to deduct the current price from the future price and the difference will be divided at the current price. This capital gain will be added to the future value of the reinvested coupon. And the two years return now comes to 27.80%. And if we analyze this return over the two years, it comes to 13%. So, our horizon analysis yield a 13% rate of return as an overall return on this two years bond investment.