The sector selection is one of the most important performance drivers in a corporate bond portfolio. The overweighting and underweighting of different industries is a key element in a corporate bond strategy. The weighting of sectors in a corporate bond portfolio is the result of controlled deviations from the benchmark. They are based on the analysis of the operating environment of specific sectors, a bottom-up analysis of the respective companies and the risk-return profiles of bonds from a specific sector. It is advantageous to set up a corporate bond team by sectors because this structure allows an in-depth coverage of all sectors and the understanding of the competitive environment as well as the market positions and management strategies of single companies out of each sector. An industry consists of a group of firms which offer products that are close substitutes for each other.

Let’s say that you want to buy the example property we mentioned earlier. Remember, this property consists of two houses on one 5,197-square-foot lot, which were built in 1948. The mix has two one-bedroom houses that are in good condition. The owner wants $279,000 for this property. Is that a fair price? We’ll see. After checking with a few local brokers and appraisers, let’s further assume that you are able to locate three comparative sales (comps). We’ll call these comps Properties “X,” “Y,” and “Z.” Here’s what we know about those properties.

Property “X” also has two houses and looks like it may have been built by the same contractor as the property you want to buy. The difference is both units have two bedrooms each (the Lawndale duplex has one one-bedroom and one two-bedroom). Property “X” also has nicer landscaping. This property sold two months ago for $293,900.

Property “Y” is an attached duplex, was also built in 1948, and is the same size and condition as your property. The units have open parking instead of garages. This building sold a few months ago for $264,000.

Finally, Property “Z” is also just like the property you want except that it sold one year ago for $262,000. Because the sale occurred so long ago, it may be less relevant, albeit still important, to analyze, for there aren’t any other comps available.

The final item needed for this valuation method is the expected capitalization rate. The capitalization rate is determined by understanding how much of a return investors can expect to realize in a particular market. The rate will vary in different parts of the country, in different parts of a city, even in buildings within a few blocks of each other.

Additionally, residential, commercial, and industrial properties also have varying capitalization rates. Remember, because the capitalization rate measures the profitability of an investment, certain types of properties involve other risks and thus dissimilar profit possibilities.

Structural deficits are mismatches of spending and revenues built into a government’s tax system and spending patterns. Structural deficits and structural surpluses, their opposite number, are calculated by
projecting a government’s spending and revenue and comparing the two. These projections are called current service or baseline projections. Not all states make such projections. Not all states having such projections make them public. And not all projections use the same methodology.

Having a structural deficit means a government cannot continue its current spending patterns without raising taxes. The shortfall is often called a budget gap. Conversely, a structural surplus means that current taxes will generate enough revenue to pay for current services with some money left over, sometimes called a fiscal dividend. This money could be used to add new spending, or cut tax rates, or some combination of the two.

Structural deficits and surpluses differ from cyclical deficits and surpluses. The effects of strong economic growth are so positive for most governments that they will show a temporary cyclical surplus in a year of economic boom even if they have a structural deficit. Likewise the impacts of recession are so negative that even states with a structural surplus over the long term may show a deficit in a recession year. Federal and state long-term budget projections do not include predictions of recessions and booms on the theory that they average out in the longrun and their exact timing is impossible to predict.