Can some one please explain the processing for “rolling over” the securities?
Book says roling over 6-month securities is profitble. is it because he is locking in the rate at a higher level?
if you expect int rates to rise in 6 months, you want to keep your duration very short so you can then “roll” into these in 6 months and get higher rate
if you expect int rates to decline in 3 months, you want longer duration, so you can lock-in your current rate for a longer time and not have to “roll” into a security at a lower rate in 3 months
The table looks un-intuitive to me. When the yield curve is inverted, how come the interest rates are lower? If the interest rates are higher when the yield curve is inverted, the conclusion for 6.B may be different or at least I may need to calculate it with a calculator. [The investor can roll over and invest in a higher short-term rate].
Since int rate curve is downward looking after sep longer duration bond get higher appreciation. Intutively also 6 months rates looks better as one will lock 6.35 and 6.68%, more so for second half
To check, I made the line chart & ran the spread sheet
Invest $ 100 at the beg of Mar-00 for six month at 6.35% - value at end of Aug 103.25 again invested at 6.68% for another six month- ending value 106.71.
Invest 100 at the begining of mar-00 for one month & roll it over till mar-11. Ending value 106.87.
It seems better to invest in 1 month roll over. Why 6 mnths is ans?
Rahul, what about the price appreciation gained when the int rates are falling in second half? The one with higher duration will gain better…
Yes, YC is increasing in first couple of months then becoming flat for some time while inverting down in the last 3-4 months.
Holding period return includes both price & coupon return. So one with higher duration (six months) will gain more than low duration (one month) due to inversion of YC.
BTN - Veera, do u reside in BOM?