Fixed Income Flashcards

Question

Yield Curve Sloping

Answer 1

* Positively-sloped yield curve: Rolldown return is higher as yields will be decreasing and price will rise. * Downward-sloped yield curve: Rolldown return is lower as yields will be increasing and price will fall.

Answer 2

* Repurchase agreements (Repo) * Futures Contract * Swaps Agreements * Structured Financial Instruments: Inverse Floaters * Security Lending

Answer 3

* The longer the term of the repo and the more in demand of the collateral the higher the rate * Normally from the dealer preceptive (borrower) * The dealer will sell securities and receive funds (very short term “days”) at the same time the dealer agrees to buy back the securities at a specific time at a higher rate (the security and interest) * Rates are quoted at an annualize rate (mark to market daily) * The (dealer/borrower) can deliver any securities previously agreed to. * The lender could ask for more securities (collateral) than what is borrowed.

Answer 4

* Security-Driven Transactions: "Bilateral" Between 2-parties directly cash + securities * Cash-Driven Transactions: "Triparty" 3rd party (a bank) who holds the underline collateral **Repo Rates:** * A repo rate will be higher if the borrower still holds the collateral * A repo rate will be lower if the borrower gives the securities to the bank or if the lender wants a specific collateral (arbitrage collateral).

Answer 5

* By lending securities temporarily, it provides additional income and support to short selling. * A short seller might be required to immediately post (borrower the securities). * Could invest the cash or other securities as collateral will earn interest. * If the lender earns more than the fair value of the collateral a portion will be rebated to the borrower. * Unlike the repo market security lenders have no specified maturity. * Earnings are dependent on the need of the security bowered.

Answer 6

* Liability Driven Investing (LDI) * Asset Driven Investing (ADI) * Asset-Liability Management (ALM)

Answer 7

* Managed to generate future cash inflows that exactly match or otherwise cover expected future cash outflows * The aim is to manage the assets to meet the liabilities. * The liabilities are given and not driven by the assets

Answer 8

* Type 1: Known Amount and Known Date * Type 2: Known Amount and Unknown Date * Type 3: Unknown Amount and Known Date * Type 4: Unknown Amount and Unknown Date **Different Types of Liabilities Modeling:** * Type 1: Can be modeled by Macaulay Duration * Type 2, 3, & 4: Model by effective duration

Answer 9

If interest rates are rising the bond prices will decline, this will drag the return down, the coupon is reinvested at a higher rate thus increasing the return.

Answer 10

* Do not have any explicit coupon rate (its implicit) * Issued at a deep discount from Par and will become Par at maturity (difference from accrued interest) * By finding the present value of that liability today and you purcahsing a zero-coupon bond so it funds the liability in that time period. If done perfectly there is no cash flow risk. * A zero-coupon bond does not have immunization “reinvestment risk” or structural risk

Answer 11

* Creates a portfolio of assets; duration is exactly equal to the time horizon when the liability is due * Uses the Macaulay duration of a zero-coupon bond which will equal the time to maturity * The Macaulay duration of an asset if equal to the time horizon it will cancel out the price and reinvestment risk

Answer 12

1. PVA > PVL (Portfolio market value should be ≥ to present value of the liability) 2. DA = DL (Macaulay duration is = to the investors time horizon which is the due date of the liability) 3. Minimizes portfolio convexity in order to minimize dispersion of asset cash flows and reduce risk to reshaping’s of the yield curve (structural risk) 4. Rebalancing the portfolio to maintain the duration match as the and yields change.

Answer 13

* Increase in the Yield Curve: The portfolio value will decrease, which will be greater in the portfolio. The decrease asset and liabilities will be less than the present value of liabilities due to the convexity effect * Decrease in the Yield Curve: The convexity will push up the bond further than initial duration alone. The present value of the asset will be greater than liabilities and future value * If we build a portfolio greater than the liability payable date will benefit from any parallel shift in the yield curve and structural risk

Answer 14

* Bullet: Concentrated exposures in the intermediate-term bond (a bond) “A single liability” * Barbell: Exposures to the short and long-term on the yield curve to achieve the same overall duration * Ladder: Spreads the exposures evenly over along the yield curve between the shorter and longer term

Answer 15

Assumption used: * Rates do not change in the middle (medium)-term * Move in the short-end and long-end

Answer 16

* Long-term rates rise and short-term interest rates fall * Portfolio market price will decrease the high duration bond will have a bigger impact. * Short-term interest rates decline, while the longer duration interest rates are rising * The decrease in the value long-term bond will be greater than the increase of the shorter-term bond * Conclusion: Bullet outperforms the Barbell

Answer 17

* Long-term interest rates declines and short-term rates are rising * Long-term durations market value will increase and exceed the decrease in the Short-term duration * Conclusion: Barbell outperforms the Bullet

Answer 18

* Short-term rates and long-term interest rates are rising, short-term and long-term bonds will decline * Intermediate-term interest rates are declining, but prices are rising. * The present value of the asset will decline, liabilities will rise, and will no longer be able to pay off the liability when due * Creates significant structural risk * Conclusion: Bullet outperforms the Barbell

Answer 19

* Short and Long-term interest rates are declining intermediary are rising * Short and long-term bonds/assets market value are rising liabilities present value are declining * Conclusion: Barbell outperforms the Bullet

Answer 20

* Risk immunization is higher when the change in the portfolio IRR is insufficient to fund the liability when interest rates change * They are from twists and non-parallel shifts in the yield curve can be reduced by the dispersion (greater convexity) of the asset cash flows around the liability date

Answer 21

**Advantages:** 1. Protects a portfolio against interest rate risk 2. Is a passive investment strategy, it can be used to enhance portfolio returns. Macaulay duration equals that of the required payout stream. 3. An immunized portfolio can be used as a benchmark against which an actively performance can be compared. **Disadvantages:** * The inability to completely eliminate immunization risk; not protected from structural risk or reshaping of the yield curve. * The need to rebalance creates logistical problems and increases the expenses associated * Protects a portfolio from interest rate risk and eliminates other types of risk, (default risk, call risk). * If a bond in a immunized portfolio is called, or if any unscheduled payments are made, a major rebalancing is required and it may cause the portfolio to fail to meet its goals.

Answer 22

1. Immunization strategy 2. Cash-flow strategy 3. Contingent immunization

Answer 23

1. Present value of assets (PVA) must equal the (PVL) present value of liabilities payments stream 2. Duration of the portfolio (DA) must equal the (DL) duration of the payments in the liability stream 3. The distribution of the durations of individual assets in the portfolio must be greater (wider) the distribution of the duration of the payments in the liability stream

Answer 24

* Needs to be an asset in the portfolio that has a duration ≥ the labilities stream. * Needs to be an asset in the portfolio with a duration ≤ the longer duration liability stream in order to avoid the reinvestment risk. * If interest rates rise, you want a bond with a duration that is less than the first liability, invest the cash flows at a higher rate to pay the first liability * If interest rates declines, the greatest duration asset and would be ≥ the longest liability as you can sell it to pay off the last liability earlier before maturity * The portfolio should be continuously rebalanced

Answer 25

* A hybrid strategy in which the market value of the asset is above a specified floor value. * If the market value falls below the “threshold” it can no longer be actively managed the portfolio (immunize) * The manager the amount above a threshold or the whole portfolio will be managed actively.

Answer 26

* Dedicated Portfolio: It is not only cash flow matched but also duration matched * It is a lot simpler than immunization * Generates the cash flow available when the liabilities come due (unaffected by interest rate changes) * The easiest way is to buy a series of zero-coupon bonds to payout when the liabilities come due this would eliminate all credit risk, call risk, reinvestment risk, and interest rate risk

Answer 27

1. You must find corporate bonds with the maturity that matches the highest liability. 2. Bonds are purchased that are mature with a par and coupon on the longest liability date. 3. In a recurve procedure the next longest liability is funded with another bond using the Par, coupon, and the coupon of the next longest bond this is done to match all liabilities.

Answer 28

Can provide leverage in a synthetic way * Payer: Reduces Duration = Receive Floating; Pay Fixed * Receiver: Increase Duration = Receive Fixed; Pay Floating Swaption: It’s the same as a swap but you have the option to exercise option or not

Answer 29

"Full replication approach" have every bond in the index along with the same weights **Advantage:** * Performance as it would mirror the benchmark * Diversification * Minimize Tracking Error/Risk **Disadvantage:** * Impractical as you would need the same exact bond as the index * Fixed income market is very large with many different bond and their characteristics * Any one issuer could have many different of bonds outstanding * A lot of the bonds in the benchmark do not trade * A lot of these prices uses matrix pricing

Answer 30

* Same level of risk as the index but with fewer bonds * “Risk control strategy” trying to align the risk exposure of the portfolio with the benchmark * Portfolio manager does this by trying to consider primary risk factors

Answer 31

1. Modified Duration 2. Key Rate Durations 3. Present Value of Distribution of Cash Flows 4. Sector and Quality Percent 5. Quality Spread Duration Contribution 6. Sector Duration Contribution 7. Sector/Coupon/Maturity Cell Weights 8. Issuer Exposures

Answer 32

* To evaluate “Partial Duration” * Used to identify a bond’s sensitivity to changes in yield curve shape (shaping/structural risk) * Superior to modified duration for measuring non-parallel yield curve changes (differences across maturities) * Change in yield for each segment of the yield curve can be multiplied by each key rate duration multiped by bonds in that segment to get the effect of the expected yield curve

Answer 33

* "OAS Duration" * The percentage change in price for a given percentage change in yield spread * Measures how the price of one bond will change relative to the price of another bond if the differences in yields between two bonds change * Normally done by sector not individual bonds * If Lower than the Index: The portfolio will be less exposed to spread risks. * If Higher than the Index: The portfolio will be more exposed to spread risks. * Treasuries have a spread duration of zero * Fixed rate securities Modified duration and spread duration will be the same * Floating rate securities, they have a low duration, but a high-spread duration

Answer 34

ESG concerns can be implemented with this type of strategy

Answer 35

* Replicate the benchmark * Mutual funds and ETFs * Synthetical Strategies: Total Return Swap * Exchange Traded derivatives

Answer 36

* If you want synthetic exposures or leverage * Net payment: If it is positive, you get the return; if it is negative you have to pay * The dealer has a benefit as well as they eliminate the inventory risk * Reduced transaction cost and research cost * Gets insight of the bond dealer’s research without having to pay for the inventory **Disadvantage:** * The investor doesn’t actually own the securities * Counter party risk * Relativity short term in nature: Rollover risk * The dealer could add a surcharge to the bid-ask spread * Regulation Change

Answer 37

* Purchase equal amounts that will come due in each year the maturing bond then are reinvested again * Naturally Liquidity: bonds are going to come due each year this the (large bid-ask spread reduced) * Diversification of cash flow across time and yield curve this there will be less concentrated exposures to any specific twist on the yield curve * Diversification of price risk and reinvestment risk * The convexity will be more than the bullet but less than the barbell

Answer 38

* Level: Parallel shits up or down the same percentage wise * Slope: Yield curve becomes flatter or steeper * Curvature: Curve changes to either a straighter or curvier line

Answer 39

* Increase in Curvature: short-terms and long-term rates do not change, but intermediates rates rise * Decrease in Curvature: short-terms and long-term rates do not change, but intermediates rates fall * Most changes in the yield curve will involve more than one-source

Answer 40

“Upward Sloping” * Buy and Hold * Ride The Yield Curve * Carry Trade * Sell Convexity

Answer 41

* Assuming the yield curve is unchanged you buy longer-term bonds * Purchase a bond with a combination of a higher duration and a position at the end of the relatively steeper portion of the yield curve * As time passes and its yield declines it will provide a greater increase in price and a greater return. * The return to riding the yield curve is higher if the rolldown price is higher and the coupon is higher.

Answer 42

* Reduce Convexity if you believe the yield curve will not change * Convexity is only beneficial if there is a large change in yields or interest rates * Benefits of convexity magnifies the upside and reduces the downside * Positively convexity: Only has impact on price unless there is a significant change (> 50 basis points) * Bonds that have high convexity will have lower yields because they are highly demand.

Answer 43

* Interest Rates Decline: Convexity pushes up the price more than duration alone would suggest * Interest Rates Increase: Convexity provides support than duration alone would suggest

Answer 44

* Increase Convexity: Use a barbell as it will have the higher convexity and wider dispersion of cash flows, but would have a lower yield * Decrease Convexity: Use a bullet as it will have the lowest convexity, less dispersion of the cash flow, but a higher yield * Shifting: between barbell and bullet strategies will only have a modest impact on convexity you can have a greater impact on convexity by using options on bonds. **What do Options do to Convexity**: * Long Calls/Long Puts: Increase Convexity * Sell Calls/Short Puts: Decreases Convexity

Answer 45

* It is another form of leverage, borrow in a lower interest rate, invest in higher interest rate * Violation of the uncovered interest rate parity * The most important thing is that they yield curve is stable and upward sloping * If long-term rates rise it will lower the value of the assets and return * If short-term rates rise the cost of borrowing might wipe out all profits * Currencies have the same risk as bond, but also has exchanged risk

Answer 46

* Increasing: Intermediate interest rates will rise the most, you want exposure to the barbell * Decreasing: Intermediate interest rates will decline the most, you want exposure to the bullet

Answer 47

* Bullet would be the best because it has no/limited exposure to the relatively large increase in interest rates to long-term duration bonds * Barbell would be the worst * Increases in the slope (difference between long-term and short-term yield). * An optimal positioning strategy is one that combines short duration exposures to long-term bonds and long duration exposure to short-term bonds.

Answer 48

* Barbell would be the best as you want the greatest exposure to the relatively large decrease in interest rates to long-term duration bonds * Bullet would be the worst

Answer 49

Leverage way of capture value when curvature changes * Long Position in either a bullet or barbell and take the opposite position short * Due to this no initial investment of capital is required

Answer 50

For Convexity * Positive Butterfly/Negative Butterfly Spread: Short/borrow in the body and go long/invest the wings; Profit from an increase in curvature, net positive convexity leads to a lower yield * Negative Butterfly/Positive Butterfly Spread: Long/invest in the body and go short/borrow the wings; Profit from a decrease in curvature, net negative convexity leads to higher yield

Answer 51

Similar to the butterfly but there are 2 positions with relatively close durations in the body

Answer 52

* Bullish Steepener: Short-term yields fall > Long-term yields; -ΔLevel (bullish) + ΔSlope (steepener) * Bearish Steepener: Long-term yields rise > Short-term yields; +ΔLevel (bearish) + ΔSlope (steepener) * Bullish Flattener: Long-term yields fall > Short-term yields; -ΔLevel (bullish) - ΔSlope (flattener) * Bearish Flattener: Short-term yields rise > Long-term yields; +ΔLevel (bearish) - ΔSlope (flattener)

Answer 53

**Made up of 2 Components:** * Loss Severity: “Loss given default” percent of principal that won’t get paid if there is a default * Default Risk: Probability of the issuer will not make the timely payment of interest and principal

Answer 54

Decline in the price of a bond relative to a risk-free bond due to the spread widening

Answer 55

Risk of a particular bond decline in credit quality and/or credit rating

Answer 56

Percentage change in credit spread using historical market data and statistical models

Answer 57

* Between statement dates the rates change * On the settlement date the rate will be adjusted to the market interest rate, the bond will trade at par * Price of the bond is incentive to rate changes as future coupon will adjust for any change in rates. * The duration is tied to the modified duration as rates change * Spread durations on are not affect for interest rates change (does not include treasuries)

Answer 58

* Tend to be negatively correlated in economic boom; low defaults * Bonds will improve in credit ratings, spreads will narrow (decrease). * Stronger economic times: The Fed will increase the interest rates to reduce economic overheating * Weaker economic times: The Fed will lower the risk-free rate; increase the likelihood of defaults, decrease in the credit rating, and spreads will widen

Answer 59

**Investors in Investment Grade Bonds:** * Primary concern is interest rate risk * Secondary concerns are credit risk and spread risk **Investors in High-Yield Bonds (Junk Bonds):** * Primary concerns are credit risk and spread risk * Secondary concern is interest rate risk

Answer 60

* Ability to buy or sell a bond at the market value * Not a concern for investment grade bonds, but much more of a concern for high-yield bonds * Bid-Ask Spreads are wider for high-yield bonds because of the size of the bond issues are much smaller * More risk management and regulation * Costly and less turnover due to the transaction cost

Answer 61

* Simple to calculate, widely understood * Difference in YTM of a bond and a similar duration (maturity) government bond (treasuries) * Treasuries are non-credit securities (no credit risk) and on the run treasuries yield typically used as the benchmark risk-free bond * Disadvantages: Maturity mismatch, curve slope bias, inconsistent over time

Answer 62

* Spread over interpolated government bond * There are only 7 maturities that are issued on treasuries you need to use interpolation for any of the missing yields to compare the bond to on-the-run treasuries * Uses on-the-run treasury yield curve, interpolating any maturity, comparing the bond to the treasuries * Transparent, directly shows how to hedge the risk and retain the credit spread over the treasuries * Disadvantages: Subject to changes in government bond demand

Answer 63

Yield spread over swap rate of same maturity **Advantages:** * Spread curve will have a smoother yield curve than the g-spread because quotes can be quoted from many different maturities * Spread versus market based (MRR) measure often used as hedge or for carry trade **Disadvantages:** * Swap fixed rates usually reflect very high quality, but not credit risk-free securities * If the market is in crisis it might not be a good proxy for the risk-free rate * Swap fixed rates are not the same as government bond yield spread and g-spreads * Not useful for option bonds

Answer 64

* Looking at the g-spread, i-spread, or benchmark spread you are looking at the elements of a nominal spread (different in YTM). * However, you are only looking at 1 point on the yield curve but ignoring the shape of the yield curve. * You can overcome this by using the z-spread.

Answer 65

* Describes the spread over MRR received by the fixed rate payer in a swap. * One part of the ASW is the difference between the bond coupon and the par swap rate; the other part is the difference between the bond price and par values. * Transparent, traded spread that converts current bond coupon to MRR plus a spread * Disadvantages: Market-based spread rather than cashflow-based and not useful for option bonds

Answer 66

* Constant yield spread over a government (or swap) spot curve * Is a spread in basis points of the treasury spot rate curve (swap zero rates) to discount the free cash flow of an option-free bond to its current market price * You discount each cash flow by its own unique spread plus the z-spread * Does not consider embedded options features or discount or reward any volatility in the market place * Volatility in a market place will impact the discount rate that you are using to price that a bond but does not affect fixed cash flows expected

Answer 67

* Allows fixed-income portfolio managers to separate the risks of credit events from interest rate risk * Buyer wants protection, seller collects a premium * If there is an event (multiple defaults) the seller will have to payout. * The seller takes on the credit risk which is all based on a credit event, not market value going down * Difference between yield spread and CDS spread of same maturity * Advantages: Transparent, Interpolated CDS spread versus Z-spread * Disadvantages: Market-based spread rather than cashflow-based and not useful for option bonds

Answer 68

* Credit Spread: Is an incremental return that you are receiving over a benchmark yield (likely a treasury) to calculate that spread for taking in credit risk. * If spreads are widening (interest rates increase) it will reduce performance as prices declines * If spreads are narrowing (interest rates decreasing) it will increase performance as prices increases * You can add the loss severity and probability of default (binary) it’s called “estimated excess return”.

Answer 69

* Selects the best relative value securities from bonds universe of the market sector. * Can be applied across securities with similar credit risks. * The manager is measured against a benchmark and should determine if it is reasonable * Looks for relative misvalued securities to represents the sector * Must gather all information taking into account different risks, historical default rate, charting, and pass spread relationships

Answer 70

Determine probability of default (POD) over time using financial ratios along with macroeconomic variables and the firm's sensitivity to them.

Answer 71

* Estimate asset value and volatility of asset value. * The probability of default is the probability that asset values decline below liability values.

Answer 72

Looks at the spread for similar securities with the idea that, all else equal, managers prefer greater yield for the same risk and, for non-similar securities, whether the excess return sufficiently compensates for the risk imparted by non-similar factors.

Answer 73

* Shows the spread of the fitted curve for each issuer's securities of different maturity or duration. * Any bonds that track above their issuer’s curve is attractive (buy) and that is not (sell). * All else being equal a narrower spread is desired as it implies lower risk and a higher price * Advantages: more liquid and more analysis can be done **Disadvantages:** * Too much supply will saturate the market * The company issuing too much will have declining credit quality, and highly leveraged

Answer 74

1. Liquidity 2. Date of Issue (on-the-run-more attractive) 3. Pending new supply as older issues less likely in demand 4. Security in case of a bankruptcy (subordinate have a higher excess returns) 5. Size of issue and total issue outstanding by the issuer (larger the better) 6. Identify the potential risk exposures and having relative to value holdings

Answer 75

* Macro-factors focus on interest rates, inflation, and change in GDP using historical patterns * Can be used to identify sectors that improve vs decline in spreads (due to lower risk) * Default rates and economic growth are normally negative correlated * Must be able to predict economic considerations to add value * During economic decline there will be a flight to quality * Shift to cheaper high yield bonds to anticipate strengthening economic growth * Shift the average credit rating upward to anticipate weaker economic growth

Answer 76

* Security markets may experience a larger decline than their standard deviation * During a market crisis diversification fails and correlations become closer to a positive +1 * Downside risk will be greater than expected * The Tail is the Event **Manage Tail Risk:** * Trying to quantify the risk and hold securities that are likely to benefit if the event occurs * Diversify the portfolio and hold securities that are likely to benefit if the event occurs * Using credit derivatives (CDS); Issue is the cost incurred to purchase

Answer 77

* Size have been increasing and are in similar size to high-yield sector * More direct government ownership in local companies which give support to credit problems * Sovereign Ceiling: Rating on non-government bonds might understate the quality because the rating agency will not rate the issuer higher than that of the government country * Liquidity is a concern, as they don’t have the same transparency and reporting requirements * Currency risk especially if they are declining * Legal risks as bankruptcy laws and legal protections are not as robust

Answer 78

* Upward-sloping: Implies narrowing spreads that widen over time. Sell protection in the short maturity and go long protection in the long maturity portions of the curve. * Downward-sloping: Implies widening spreads that narrow over time. Buy protection in the short maturity and go short protection in the long maturity portions of the curve.

Answer 79

MBS, CDOs, ABS * Alternative to corporate bonds which provides a higher yield * They have a tailored risk exposure credited in different tranches * Early tranches will get paid off first, less subjected to risk, smaller returns * Diversification benefits they can reduce the overall standard deviation and keep the same returns * Have similar yield and similar spreads to corporative bonds but the with greater trading volume and liquidity * Can adjust exposure themselves to interest rate volatility

Answer 80

* Are securities whose underlying cash flows are the interest and principal of the underlying * Represent a diversified pool of debt obligations, involve trenching into payments of different risk classes * Senior Trench: Lowest expected return, high expected quality * CDO leverage exposures to credit risks as the bottom tiered tranches mezzanine or equity tranches are similar to a very highly leveraged investment in the collateral * Collateralized loan obligations (CLOs): are CDOs comprised of loans rather than bonds.

Answer 81

**If a manager believes that there is:** * Perfect Correlation: The items to support each of the tranches (all collateral will default, or none will) they would purchase the lowest tiered tranches to get the higher expected return as the higher tired tranches are just as likely to not get paid. * Negative Correlation: The items do not support each of the tranches (some collateral will default) they would purchase the highest tiered tranches because some of the tranches will be paid, and some would not.

Answer 82

* Difference in price between 1 longer dated bond to a shorter dated bond at the same YTM. * A bond trading at a “Premium” price will pull to Par over time, the premium amortization will be a loss to the investors. * A bond trading at a “Discount” price will push to Par over time, the discount amortization will be a gain to the investors.

Answer 83

* If the refence entity’s credit spread trade above the standard coupon rate the CDS contract will be priced at a discount to Par because the protection seller effectively receives a below market periodic premium * If the reference entity’s spread trades below the standard coupon rate the CDS contract will be priced at a premium above Par because the protection buyer is receiving an above market periodic premium

Answer 84

* If the OAS = Z-Spread = The Bond is Option Free * If the OAS > Z-Spread = The Bond has an Embedded Put Option * If the OAS < Z-Spread = The Bond has an Embedded Call Option Full Price = Price Today + Accrued Interest OAS: is used as the spread to calculate portfolio spread.

Answer 85

If interest rates are declining the bond prices will rise, this will pull the return up, the coupon is reinvested at a lower rate thus decreasing the return.

Answer 86

* The higher empirical duration is desired * Empirical duration when bond prices move plotted against a risk-free rate * Investment grade bonds are subject to lower default risk and narrow credit spreads * High-yield bonds are subject to higher default risks and wider credit spreads * In a rising rate environment High-yield bonds will likely have a lower empirical duration as their yield will not rise as much proportionally than an investment grade bond.

Answer 87

* Up and the yield on the movement is smaller than the implied yield changes the price of the bond will outperform * Up and the yield on the movement is larger than the implied yield changes the price of the bond will underperform * Down and the yield on the movement is larger than the implied yield changes the price of the bond will outperform * Down and the yield on the movement is smaller than the implied yield changes the price of the bond will underperform * If future interest rates evolve according to the forward rates implied by the original yield curve, all bonds give the same returns for the same investment horizon regardless of their maturity.