"If the trader does not believe that the yield curve will change its level and shape over an investment horizon, then buying bonds with a maturity longer than the investment horizon would provide a total return greater than the return on a maturity-matching strategy. " what does matching maturity strategy mean exactly. i understand rolling down the yield curve produces higher total returns but what does this have to do with a matching strategy. can anyone explain.
If you have an investment horizon of, say, 5 years, then you buy 6-year bonds, or 7-year bonds, or 10-year bonds: the maturity of the bonds is longer than your investment horizon.
how is a return on a matching maturity computed? I am not really understanding the mechanics of this strategy.
Suppose that the spot rates are:
- 1-year: 2.0%
- 2-year: 3.0%
- 3-year: 3.5%
A 3-year, 6% coupon, annual-pay bond will be priced at $1,071.44, and have a YTM of 3.4524%.
Suppose that one year later, the spot rates are the same. You now have a 2-year bond priced at $1,057.98. Your holding period return is ($1,057.98 + $60.00) / $1,071.44 − 1 = 4.3434%.
ok this seems to be the calculation of rolling down the yield curve right? What I am asking is about the maturity matching strategy. Maturity matching sounds like I don’t want to buy a long tenor bond so I buy shorter tenor bonds and roll over until my maturity is matched. I.e. instead of buying a 5 year bond I buy 1 year bond every 1 year until I get to 5 years. I read the cfa text and I think thats what it is. Can you confirm? if thats what it is and I assume my yield curve doesnt change then I should get equal returns between a maturity matching strategy and rolling down the yield curve right? Something is missing in my understanding of this.