Hi All,
I do not understand the following:
’ For an upward sloping yield curve, immunization target rate of retrun will be less than yield to maturity because the lower reinvestment return. Coversely, a negative or downward sloping yield curve will result in an immunized target rate of retrun greater than YTM because of thehigher reinvestment return.’
My Q is that if the yield curve is upward sloping, then reinvestment rate will higher??!!
please check on the forum. (use the search). there have been many posts on this same comment (and possibly started by you in the past couple of years). So first check that resource. I am pretty sure there were explanations provided for this.
key to remember - an upward sloping yield curve means that
you had a 10 year bond initially.
when it became a 9 year bond - after 1 year - and yield curve was upward sloping - the yield was higher now - so if you looked at terminal value of the bond - it is going to be LOWER than what it was initially. Overall the net impact of a lower terminal value would be a lower reinvestment return. Even though you receive higher interest on interest over the life of the bond - the key piece - the terminal value is lower now - and that leads to a lower reinvestment return (reinvestment return = total return on the bond).
Thanks CPK. I will search.
I thought that reinvestment return is retrun earned on reinvesting the coupon- and you say that it is = total retrun earned on the bond? Care to clarify?
Thanks CPK.
Point regarding time passage and lower terminal value is very helpful.
my bad. reinvestment return = return from reinvesting the coupon, but target rate of return is the total return.