why does a + unexpected interest rate mean that there’s a decline in interest rates?
for example, expected interest rates 7% and actual 9%; doesn’t this mean that rates have risen more than expected?
morning 2008 am session question 10.
this is the unexpected interest rate effect - and not just unexpected interest rate.
this has to do with performance attribution for a bond portfolio.
expected interest rate effect: Expected return on bond portfolio due to the implied forward rate on treasury securities at the beginning of period.
unexpected interest rate effect: Actual return on the Portfolio less the expected interest rate effect.
so if the unexpected interest rate effect is positive - and since we are talking about a bond portfolio - rates must have fallen MORE than the implied forward rate on treasury securities OR you have experienced a favorable twist on the yield curve - so your returns are higher.
ohhhhhhhh my bad … i was looking at it from the angle of interest rate not interest rate effect ,if the effective is + it means that the price should go up thus interest rates are falling … :d great thanks!!!