The book states (page 29, Vol 4) that when Yield curve is upward sloping the immunization target return is lower than YTM because of lower reinvestment return. When the yield curve is upward sloping does that not mean that you can invest at higher yields (than YTM which assumes they are invested at the rate of the YTM) and therefore the reinvestment returns should be higher? What am I missing here?
I think in upward sloping the yield will be high in long duration , but if you reinvest interest or principal in bond , the yield will be much lower for duration is lower . if downward sloping , target return will be higher than YTM for higher reinvestment return
This confused me for a while too… I still am not sure of the logic 100%, but what has helped me remember it is to consider the “immunized rate” as a fixed rate that you determine at time 0. Then if the YTM increases, obviously you are reinvesting at a lower fixed rate than is currently available in the market, hence Immunization rate < YTM
At time zero your immunization target will equal the YTM, say 5% If rates rise during the year your immunization target is still 5% but your YTM is now higher because of the rising rates
use search function, this one is old , and of course never quite resolved
I think that when curve is upward means than you will need to sell part of investment at loss to rebalance as reinvestment at higher yield will compensate. vise versa. The overall yield will remain the immunized one.