Portfolio Management Pathway · Yield Curve Strategies

Static Yield Curve Strategies: Buy-and-Hold and Roll-Down

Q: What is roll-down return in the CFA Level III curriculum?

It is the price gain a bond earns as it ages and moves down an upward-sloping curve to a lower yield. You compute it as the change in price divided by the beginning price. Add coupon income to get the rolling yield.

Q: How is riding the yield curve different from buy-and-hold?

Buy-and-hold keeps the bond to maturity and earns about its yield. Riding the curve buys a bond with maturity longer than the horizon and sells at the horizon. The extra return comes from the roll-down price gain, and it carries price risk.

Q: Does roll-down work on a flat or inverted curve?

No. On a flat curve the roll-down return is about zero. On an inverted curve it is negative, because the bond rolls to a higher yield and a lower price.

Q: What is a carry trade in fixed income?

You borrow at a low short-term rate and invest in a higher-yielding longer bond. You earn the spread between the bond's return and the funding cost. It works while the curve stays the same and loses money if yields or funding costs rise.

Updated 8 October 2026 · Fact-checked

Static yield curve strategies assume the curve does not change. Buy-and-hold earns the bond's yield. Riding the yield curve buys a longer bond and sells it as it rolls down to a lower yield. Return equals coupon income plus roll-down price gain. A carry trade borrows short and invests long.

Understand Static Yield Curve Strategies: Buy-and-Hold and Roll-Down

A static yield curve view means you expect the curve to keep the same shape and level over your horizon. You are not forecasting rate moves. You are asking what return the curve itself pays you if nothing changes.

Buy-and-hold is the base case. You buy a bond and keep it to maturity. If you hold to maturity and reinvest coupons at the purchase yield, your return is about the yield to maturity. Price changes along the way do not matter, because the bond pulls to par.

Riding the yield curve (roll-down) applies when you have a horizon shorter than the bond's maturity and the curve slopes upward. You buy a bond with maturity longer than your horizon. As time passes, the bond gets shorter and moves down the curve to a lower yield. A lower yield means a higher price. You sell at the horizon and capture that price gain on top of the coupon income. If the curve is flat, the roll-down return is about zero. If it is inverted, roll-down is negative.

Rolling yield is the total expected return over the horizon with an unchanged curve. It is coupon income plus roll-down return, both measured as a percentage of the purchase price. The price gain comes from the shorter remaining maturity, not from any change in the curve.

A carry trade borrows at the low short-term rate and invests in a higher-yielding longer bond. You earn the spread between the bond's rolling yield and the funding cost. Leverage magnifies it. The trade works only if the curve stays put. A rise in yields or in funding costs can turn it into a loss, so a static view carries real risk.

Key rules to remember

Buy-and-hold return: Return ≈ YTM at purchase; Holds if the bond is held to maturity, there is no default, and coupons are reinvested at the YTM.
Roll-down return: Roll-down return = (Ending price − Beginning price) ÷ Beginning price; The ending price is found at the horizon using the yield for the shorter remaining maturity, read from the unchanged curve.
Rolling yield: Rolling yield = (Coupon income ÷ Beginning price) + Roll-down return; Coupon income here is cash coupons received over the horizon. If the bond is sold between coupon dates, include accrued interest consistently.
Carry trade return on equity: Return on equity = [Assets × Rolling yield − Borrowed amount × Funding rate] ÷ Equity; Assets = Equity + Borrowed amount. Assumes an unchanged curve and a constant funding rate.
Roll-down sign rule: Upward-sloping curve: roll-down > 0. Flat: ≈ 0. Inverted: < 0; Strictly this holds for the part of the curve you ride, so check the yields at both maturities.

How to solve Static Yield Curve Strategies: Buy-and-Hold and Roll-Down questions

Use this order for any question on buy-and-hold, roll-down or carry. Show each calculation so a correct number earns full credit.

1Read the horizon and the bond's current maturity. Work out the bond's remaining maturity at the horizon.
2Find the purchase price from the bond's current yield, or use the price given.
3Look up the yield for the remaining maturity at the horizon on the curve. Because the curve is unchanged, use today's yield for that maturity.
4Compute the ending price using that yield and the remaining cash flows.
5Add coupon income received over the horizon. Compute the roll-down return and the rolling yield, both as a percentage of the beginning price.
6Compare with the alternative asked about: buy-and-hold yield, a shorter bond, or the funding cost for a carry trade.
7For a carry trade, include leverage: total assets, interest cost, then return on equity.
8State the conclusion and the key risk: a rise in yields or funding costs, or a curve that is flat or inverted, reduces or reverses the gain.

Quickest way: Four-line roll-down check

When to use it: Use when the question gives yields by maturity and asks which bond or strategy earns more over a stated horizon.

Check the slope between the bond's maturity and the horizon maturity. If it is flat or inverted, roll-down is zero or negative.
Estimate the price gain as: modified duration at horizon × the fall in yield. This gives a quick check on the full pricing.
Add the coupon yield (coupon ÷ beginning price) to the gain.
Rank the candidates by rolling yield. Rule out any that need a rate view you were not given.

Common mistakes in Static Yield Curve Strategies: Buy-and-Hold and Roll-Down

Using the original yield to price the bond at the horizon.
Students forget the bond has aged and now sits at a different point on the curve.
Fix: Price the bond at the horizon with the yield for its remaining maturity, taken from the unchanged curve.
Leaving out coupon income when computing rolling yield.
The word roll-down makes students focus only on the price gain.
Fix: Always add coupon income to the price change and divide the total by the beginning price.
Assuming roll-down is always positive.
Most examples use an upward-sloping curve.
Fix: Check the slope. A flat curve gives about zero and an inverted curve gives a negative roll-down.
Saying the curve view is risk-free because rates are assumed unchanged.
Students treat the assumption as a fact.
Fix: State that the result holds only if the curve stays the same. Yield rises or a steeper curve reduce the return.
Forgetting to include the borrowed amount in the carry trade assets.
Students apply the bond return to equity only.
Fix: Apply the rolling yield to total assets, subtract interest on the borrowing, then divide by equity.
Comparing buy-and-hold yield with rolling yield as if horizons were the same.
The two returns cover different holding periods.
Fix: Annualise or state the horizon clearly, and compare returns over the same period.

Worked examples

Example 1

A portfolio manager has a 1-year horizon and expects an unchanged curve. Annual-pay yields: 1-year 3.0%, 2-year 3.6%, 3-year 4.2%. She considers a 3-year, 5% annual coupon bond (par 100) priced at its 4.2% yield. Calculate the roll-down return and the rolling yield, and compare with buy-and-hold to maturity.

Show the solution

Purchase price at 4.2%: 5 ÷ 1.042 + 5 ÷ 1.042² + 105 ÷ 1.042³ = 4.7985 + 4.6050 + 92.8084 = 102.2119.
After one year the bond has 2 years left. With an unchanged curve its yield is 3.6%.
Ending price at 3.6%: 5 ÷ 1.036 + 105 ÷ 1.036² = 4.8263 + 97.8295 = 102.6558.
Roll-down return = (102.6558 − 102.2119) ÷ 102.2119 = 0.4343%, about 0.43%.
Coupon income = 5 ÷ 102.2119 = 4.8918%.
Rolling yield = 4.8918% + 0.4343% = 5.3261%, about 5.33%.
Buy-and-hold to maturity earns about the 4.2% YTM.

Answer: Roll-down return ≈ 0.43%. Rolling yield ≈ 5.33%, which is higher than the 4.2% buy-and-hold yield, but only if the curve stays unchanged.

Example 2

Using the bond and curve from the previous example, an investor has 10 million of equity and borrows 20 million for one year at the 1-year rate of 3.0% to buy the 3-year bond. The curve is unchanged. Calculate the return on equity and name the main risk.

Show the solution

Total assets = 10 million + 20 million = 30 million.
Return on assets = 30 million × 5.3261% = 1,597,830.
Interest cost = 20 million × 3.0% = 600,000.
Net gain = 1,597,830 − 600,000 = 997,830.
Return on equity = 997,830 ÷ 10,000,000 = 9.98%, about 9.98%.
Main risk: if yields rise or funding costs increase, the bond's price falls and the spread narrows. Leverage magnifies the loss.

Answer: Return on equity ≈ 9.98%. The main risk is a rise in yields or funding costs, which leverage magnifies.

Exam tips

In item sets, check the curve shape first. It tells you the sign of roll-down before you calculate.
In essays, a command word such as calculate needs only the number. A command word such as explain or justify needs a short reason tied to the unchanged-curve assumption.
State the assumption each time: curve unchanged, no default, coupons reinvested at the stated yield.
For a carry trade, always name the risk: higher yields, higher funding cost, or a flattening or inverted curve.
If the question gives a client's objective and horizon, link the choice to it. A short horizon with an upward-sloping curve suggests a longer bond to roll down.