Assume that you have a 5-year investment horizon. What is the total return you earn for each of the following strategies if the yield curve does not move?

I) Buy and Hold – Buy the 5-year bond and hold to the maturity.

ii) Riding the Yield Curve – Buy the 5yr bond, hold for one year, then sell when it has 4 years left to maturity, buy another 5yr bond, repeat.

iii) Bond Ladder – Start by investing 20% of your wealth in bonds of each maturity. At the end of the first year, when the 1yr bond matures, invest the proceeds in a new 5yr bond, repeat.

Maturity (in years)	1	2	3	4	5
Interest rate (continuously compounded)	3.05%	4.43%	5.38%	6.05%	6.34%

Answer rating: 100% (QA)

To calculate the total return for each strategy we need to consider the interest earned and any capital gains or losses resulting from changes in bond ... View the full answer