Hi David,

in the effect of Impact of maturity on bond returns it is shown that when forward rates are realized then returns will be same for both the investors.

my doubt is regarding the Coupon rate mentioned.woh that coupon rate was arrived to achieve the same figure?(calculating YTM using the returns from realized forward rates??).

plz throw some light on this.

Anil

Hi Anil,

(I assume you realize I have an XLS of this @ http://www.bionicturtle.com/premium/editgrid/2008_frm_bonds_maturity_versus_price_versus_return/, just in case you missed it)

Short answer: could be any coupon. If coupon changes, then bond price would need to change to be consistent with the spot rate term structure and forward rate curve.

First, the coupons are not necessary for Tuckman’s point about maturity versus returns. The point could be made with zero coupon bonds. His point is: the long term bond is implicity priced according to the forward rate curve. Another investor, who invests short and rolls over, will produce the same return only if the forward rates are exactly realized. Don’t need coupons for this.

Second, to your pricing question. The required “input assumption” is either a spot term structure or a forward rate curve. Given either (because given the spot, we can infer the forward), the long term bond will be “solved for:” if the coupon ix X%, the bond price must be priced accordingly. If the price is x$, the coupon must be calibrated accordingly.

David

thanks David..that helps..