Aggregating Bond Portfolios into Equivalent Zero-Coupon Cash Flows

Summary

The document raises a portfolio-construction problem from a life-insurance asset and liability model: whether a large bond portfolio can be represented by a smaller set of zero-coupon bonds with approximately matching cash flows. The motivation is to reduce computation when evaluating the portfolio across many economic scenarios. It also asks how to allocate the original portfolio’s market-value gains or losses relative to book value to the aggregated representation.

No aggregation procedure, allocation rule, worked example, or empirical evidence is supplied; the text is a request for guidance. It therefore identifies the modeling objective and a practical accounting question, but does not establish that cash-flow matching alone preserves portfolio behavior. Any proposed aggregation would need to specify its matching criteria and how it handles valuation, interest-rate sensitivity, credit characteristics, and scenario-dependent cash flows.

Key ideas

• A life-insurance model may benefit computationally from representing many bonds with a smaller portfolio.
• The proposed representation uses zero-coupon bonds to approximate the original portfolio’s cash flows.
• The document asks how to carry market value relative to book value into the aggregated portfolio.
• It presents these as open questions and provides no method or evidence for a particular aggregation approach.

Tags

# Bond agreggation


# Bond agreggation












I'm working on an asset and liabilities model for life insurance as a school project, one of the inputs of the model is a bond portfolio, for the sake of optimization of computation speed (the model also uses an economic scenario generator to evaluate the portfolio in multiple scenarios) i thought that aggregating the bond portfolio might help.

What i mean by aggregating is that instead of having a line by line bond database i would create an "equivalent" portfolio made with zero coupons giving (approximately at least) the same cashflows. Do you know any technique to do is, for example how should redistribute the capital gains(Market Value-Book Value) of the non-agreggated portfolio to the aggregated one?

Thank you.

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