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FRM Part II · FRM Exam Part II · The Investment Function in Financial Services Management

A bank treasurer follows a strategy of buying a bond with a maturity longer than the planned holding period and selling it before maturity, aiming to earn extra return as the bond's yield falls while it 'rolls down' an upward-sloping yield curve. What is this strategy called?

The strategy is riding the yield curve. The treasurer buys a bond maturing beyond the holding horizon and sells it early, gaining as the bond's yield falls while rolling down an upward-sloping curve. It depends on the curve keeping its shape; immunisation and cash-flow matching serve different goals.

  1. ARiding the yield curveCorrect
  2. BImmunisation
  3. CBond swapping for tax loss
  4. DDedicated cash-flow matching

Explanation

Riding the yield curve means buying longer-maturity securities than the holding horizon and selling them as they roll down an upward-sloping curve, capturing price appreciation. It works only if the curve stays upward-sloping and unchanged. Immunisation and cash-flow matching aim to fund liabilities, not to harvest roll-down.

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