Mock question - Rolling down the yield curve

CFA Level II Fixed Income
#1

Hello everyone,

I came to the following question in one CFA mock (2021 CFA Level 2 Mock Exam - PM Session):

Scenario 3: “If the yield curve is upward sloping and we expect spot rates to evolve as implied by the forward curve, then a strategy of buying bonds with maturities longer than the investment holding period will allow us to earn a return greater than a maturity matching strategy.”

Answear: “Scenario 3 is correct. If expected spot rates evolve as indicated by the forward curve (Scenario 3), then a strategy of buying bonds with maturities longer than the investment holding period will earn a return greater than a maturity matching strategy. This is known as riding the yield curve or rolling down the yield curve. As the bond approaches maturity, it rolls down the yield curve and is valued at successively higher prices and can be sold before maturity to realize a higher return.”

My understanding was that the spot was NOT supposed to evolve to the forward in order for the riding down the yield curve to work. What am I missing?

#2

You’re missing the fact that they’re wrong.

1 Like
#3

Thanks for this. I also encountered the same question today and was panicking when I read this answer since I thought that I have understood the riding down the yield scenario all wrong.

#4

Yes, magician thank you for the prompt response. Really messy from CFAI to allow such mistakes in the mocks on which so many people rely for their preparation.

#5

Amen!