Roll down return and the assumption of constant yield curve

CFA Level III
#1

Can someone pls help me to confirm
That my understanding is correct?

Let’s assume that we are calculating the roll down return of a 5 year bond that has a yield of 3% and the 4 year bond at 2.5%. The rolldown return would be the return calculation from the price difference of the 5 year and 4 year bond. Right?
However if let’s say we predict that the 4 year bond will change in yield in the next 6 months and become
1% . How do we factor that into the rolldown return? Do we use the price of the 4 year bond for 1% yield or do we still use the 2%

#2

What is the period you take into account for the rolldown return? What is the expected yield expected on the same period? They must match.

#3

You don’t.

That’s the return from an anticipated change in the yield curve, not rolldown return.

1 Like
#4

ok perfect

I got it

#5

thats not what i was asking.

#6

Good to hear.

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#7

Either I did not understand your answer or I understand that you are not polite. I tried to answer to your question with respect and with the intention to help you like others do here.

You don’t need to ace « ethics » at the exam to know that in the worst case,( when someone tries to help you for example), you can ignore the answer if you think that this answer is not what you expected and even if you think that this answer is total bullshit.

Like I say to people working for me, with me or in real life, don’t forget that devil is in the details.

Forget this answer if I misunderstood your comment.

If not think twice.

#8

I wasn’t trying to disrespectful
I think you misunderstood. It’s a messaging platform, a lot can be interpreted without seeing someone’s face
anyway apologies if you felt that way

#9

I think that there’s a word or two missing there.

#10

it was a typo

i meant to say i wasn’t trying to be disrespectful

#11

I knew that.

Thanks for being a good sport about it.

1 Like
#12

i sincerely apologize and i really mean it :slight_smile:

#13

Allow me to chip in ( boy ! It’s great to be back) . The very essence of “roll down” suggests your yield is going remain unchanged for the period of your investment . Precisely why you “ roll down” the yield curve. The next thing is the “ Pull to par” effect for any bond ( more pronounced as you roll down ).

If the first condition is not satisfied the strategy won’t work profitably for you. Precisely why it is also a short term strategy ( limited to a month)

Now let’s decode the elements here :slight_smile:
You short sell the near month over valued security
You sell at cash price
You promise to ( short sell ) to buy in the farther month ( same security of course and sometimes the equivalent T- Bonds to avoid short squeeze)
You pay the cash price

Ofcourse the short sale proceeds beget another avenue of return - The interest you earn on them for the holding period

If the yield is unchanged it would result in a positive roll return ( pull to par effect ) in absolute dollar terms

If the yield does change adversarially for the farther month ( yield reduces) your roll return may be negative

However it is also possible that the yield does change for the farther month but favourably for you( yield increases) resulting in you earning more than anticipated roll return

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