It states for an upward sloping yield curve, the immunization target rate of return will be less than the yield to maturity because of lower reinvestment return and conversely a negative,downward sloping yield curve will result in an immunization target rate of return greater than the yield to maturity because of higher reinvestment return. Is the above correctly stated? In an upward sloping yield curve isn’t reinvestement return higher and vice versa?
I believe this has been discussed many times before on the forum. upward sloping yield curve -> 10 year bond… originally rate of return was say 5% when it becomes a 9 year bond - the reinvestment rate of return will be lower since in the intervening period you have received higher returns. so the immunization target rate of return required will now be LOWER. (and it will be less than the YTM as well). Remember that reinvestment rate of return is the rate of return for both the principle and the intermediate coupon payments.
CPK Thanks for your feedback. I did try to search for discussion on this, did not find anything that addressed the issue (probably did not look through all the post0. The CFA book omits the word “required”. Given the same, I understand the concept better. Thanks again.
BTON , search for AMA’s posts .I remember a very long thread with his questions on this topic
ITRR is less than portfolio’s YTM when the yield curve slopes upwards because you were originally assuming (when you calcualted your ITRR) that the reinvestment rate was fixed (say at 5%). But now the curve is sloped upwards, thus you are reinvesting at higher rates (above 5%), so your YTM will be greater than you originally calculated. So, Day one, your ITRR = YTM Day 200, ITRR < YTM, (rates are now higher, thus your reinvestment rate is higher), your ITRR is still the same as you calculated on day one, but your YTM is now higher. the opposite is true when the curve inverts