Wednesday, October 29, 2008


Yield Curve or Maturity Risk.
In many situations, a bond of a given maturity is used as an alternative to another bond of different maturity. An adjustment is to account for the differential interstate risks in the two bonds. However, this adjustment makes an assumption about how the interest rates (i.e.yields) at different maturities Will move. In the extent that the yield movements deviate form this assumption, there is yield-curve or maturity risk.
In general, yield-curve risk is more important is hedging situations rather than in pure investment decisions. for example, if a trader is hedging a position or if a pension fund or an insurance company is acquiring assets so as to unable it to meet a given liability, then yield-curve risk should be carefully examined. however, if a pension fund has decided to invest in the intermediate-term sector, then the fine distinctions in maturity are less important.
Another situation where yield-curve risk should be considered is in the analysis or bond swap transactions where the potential incremental returns are dependent entirely on the parallel shift (or other regularly arbitrary) as summation for the yield curve.

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