Jul 08

Impact of maturity on bond return – 8 min screencast

by David Harper, CFA, FRM, CIPM

FRM |

A 2008 FRM AIM (learning objective) from Tuckman asks: "Discuss … the differences maturity has  on the return generated by bonds." In other words, who does better, an investor in a short- or long-term bond? Two keys to understanding this:

  • The spot rate curve implicitly contains a forward rate curve. As Tuckman says, "An investment in a bond is equivalent to a series of forward loans at rates given by the forward rate curve." To buy a long-term bond is to "purchase" the forward rate curve.
  • Therefore, the short-term investor does better/worse depending on the evolution of spot rates vis-a-vis the forward rate curves. If realized spot rates increase relative to the implied forward rates, the short-term investor (who is rolling over) does better.

Screencast:

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