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I don’t understand the following in relation to immunisation. Please help…
– For an upward sloping yield curve, immunisation target rate of return < YTM because of the lower reinvestment return. - For a downward sloping yield curve, the immunisation target rate of return > YTM because of the higher reinvestment return.
Wouldn’t the coupons be reinvested at the short term rates available at the time? How to link the coupons with the slope of yield curve as the coupons are due at different times? …confused
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@alta12, Take the scenario of upward sloping curve,
consider a 1 year duration and a coupon every 6 months. Now after 6 months you get a coupon. Now that there is upward sloping curve, for 6 months duration yeild will be less than what you got for a one year duration. So our target rate of return less than YTM (had the same money invested without coupon at the beginning) -
@ravivooda so you move along the x axis (time to maturity) to the left not the right hence lower yield for the coupon reinvestment?
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