2009

SHAHEED SUKHDEV COLLEGE OF

BUSINESS STUDIES

CAPITAL MARKETS PROJECT

YIELD CURVE ANALYSIS

SUBMITTED BY-

NISHTHA ANAND(4633))

TANVI ROHATGI(4606)

VIPRA DUA(4635)

10/20/2009
 ACKNOWLEDGEMENT

We express our heartfelt gratitude to Ms Rohini Singh without whose guidance and support this project
could not have been made. The discussions with her were extremely beneficial and guided us on how to
go about completing the project.

2
 TABLE OF CONTENTS

INTRODUCTION..............................................................................................................................................................4
ANALYSIS..........................................................................................................................................................................6
BIBLIOGRAPHY............................................................................................................................................................48

3
 INTRODUCTION

What is yield curve?

Yield curve analysis involves the measurement of differences in interest rates between notes that have a
different term to maturity. To evaluate the term to maturity effect, one examines the same issuer (for
example, U.S. Treasury bills) with various debt notes and maturity. The typical yield curve is upward
sloping, meaning short term to maturity notes have low interest rates and longer term to maturity notes
have higher interest rates. Of course, one strategy to maximize investment return would be to invest in the
longer term, higher yielding notes. This strategy presumes there are no immediate liquidity needs and that
the shape and level of the yield curve will not change. In fact, the shape and level of the yield curve itself
can be used to develop an interest rate forecast using an expectations theory model. This theory as it
applies to yield curve analysis states that the interest rate for a longer time period is a product of the
interest rates for the total of the shorter time intervals that comprise the longer time period. The increase
in investment yield with the longer term notes is not present if the yield curve shape is flat (same rate for
all maturities), downward sloping (short-term notes have high interest rates whereas long term notes have
low rates) and humped (a combination upward sloping and flat) yield curve.

Another aspect of yield curve analysis is the comparison of yields between issuers of a different quality
(determined by bond ratings) or sector (for example, corporates versus federal government). The spread
(difference) between the two issuers may vary by term to maturity. Opportunities to earn higher returns
may occur when the spread between the notes is not the normal amount.

Typical Shape of a Yield Curve

Yield curves are usually upward sloping asymptotically: the longer the maturity, the higher the yield,
with diminishing marginal increases (that is, as one moves to the right, the curve flattens out). There are
two common explanations for upward sloping yield curves. First, it may be that the market is anticipating
a rise in the risk-free rate. If investors hold off investing now, they may receive a better rate in the future.
Therefore, under the arbitrage pricing theory, investors who are willing to lock their money in now need
to be compensated for the anticipated rise in rates—thus the higher interest rate on long-term investments.

However, interest rates can fall just as they can rise. Another explanation is that longer maturities entail
greater risks for the investor (i.e. the lender). A risk premium is needed by the market, since at longer
durations there is more uncertainty and a greater chance of catastrophic events that impact the investment.
This explanation depends on the notion that the economy faces more uncertainties in the distant future
than in the near term, and the risk of future adverse events (such as default and higher short-term interest
rates) is higher than the chance of future positive events (such as lower short-term interest rates). This
effect is referred to as the liquidity spread. If the market expects more volatility in the future, even if
interest rates are anticipated to decline, the increase in the risk premium can influence the spread and
cause an increasing yield.

The opposite position (short-term interest rates higher than long-term) can also occur. For instance, in
November 2004, the yield curve for UK Government bonds was partially inverted. The yield for the 10
year bond stood at 4.68%, but was only 4.45% for the 30 year bond. The market's anticipation of falling
4
interest rates causes such incidents. Negative liquidity premiums can exist if long-term investors
dominate the market, but the prevailing view is that a positive liquidity premium dominates, so only the
anticipation of falling interest rates will cause an inverted yield curve. Strongly inverted yield curves have
historically preceded economic depressions.

The shape of the yield curve is influenced by supply and demand: for instance if there is a large demand
for long bonds, for instance from pension funds to match their fixed liabilities to pensioners, and not
enough bonds in existence to meet this demand, then the yields on long bonds can be expected to be low,
irrespective of market participants' views about future events.

The yield curve may also be flat or hump-shaped, due to anticipated interest rates being steady, or short-
term volatility outweighing long-term volatility.

Yield curves continually move all the time that the markets are open, reflecting the market's reaction to
news. A further "stylized fact" is that yield curves tend to move in parallel (i.e., the yield curve shifts up
and down as interest rate levels rise and fall).

Types of yield curve

There is no single yield curve describing the cost of money for everybody. The most important factor in
determining a yield curve is the currency in which the securities are denominated. The economic
position of the countries and companies using each currency is a primary factor in determining the yield
curve. Different institutions borrow money at different rates, depending on their creditworthiness. The
yield curves corresponding to the bonds issued by governments in their own currency are called the
government bond yield curve (government curve). Banks with high credit ratings (Aa/AA or above)
borrow money from each other at the LIBOR rates. These yield curves are typically a little higher than
government curves. They are the most important and widely used in the financial markets, and are
known variously as the LIBOR curve or the swap curve. The construction of the swap curve is
described below.

Besides the government curve and the LIBOR curve, there are corporate (company) curves. These are
constructed from the yields of bonds issued by corporations. Since corporations have less
creditworthiness than most governments and most large banks, these yields are typically higher.
Corporate yield curves are often quoted in terms of a "credit spread" over the relevant swap curve. For
instance the five-year yield curve point for Vodafone might be quoted as LIBOR +0.25%, where 0.25%
(often written as 25 basis points or 25bps) is the credit spread.

Normal yield curve

From the post-Great Depression era to the present, the yield curve has usually been "normal" meaning
that yields rise as maturity lengthens (i.e., the slope of the yield curve is positive). This positive slope
reflects investor expectations for the economy to grow in the future and, importantly, for this growth to
be associated with a greater expectation that inflation will rise in the future rather than fall. This
expectation of higher inflation leads to expectations that the central bank will tighten monetary policy
by raising short term interest rates in the future to slow economic growth and dampen inflationary
pressure. It also creates a need for a risk premium associated with the uncertainty about the future rate
of inflation and the risk this poses to the future value of cash flows. Investors price these risks into the
yield curve by demanding higher yields for maturities further into the future.

5
However, a positively sloped yield curve has not always been the norm. Through much of the 19th
century and early 20th century the US economy experienced trend growth with persistent deflation, not
inflation. During this period the yield curve was typically inverted, reflecting the fact that deflation
made current cash flows less valuable than future cash flows. During this period of persistent deflation,
a 'normal' yield curve was negatively sloped.

Steep yield curve

Historically, the 20-year Treasury bond yield has averaged approximately two percentage points above
that of three-month Treasury bills. In situations when this gap increases (e.g. 20-year Treasury yield
rises higher than the three-month Treasury yield), the economy is expected to improve quickly in the
future. This type of curve can be seen at the beginning of an economic expansion (or after the end of a
recession). Here, economic stagnation will have depressed short-term interest rates; however, rates
begin to rise once the demand for capital is re-established by growing economic activity.

In May 2009, the gap between yields on two-year Treasury notes and 10-year notes widened to 2.75
percentage points, its highest ever. To stimulate the U.S. economy in the hopes of ending the 2007-
2009 recession, the Federal Reserve Board bought large amounts of mortgage-backed securities and
Treasurys, which, in turn, stoked inflation fears. Moreover, the U.S. government was expected to sell
nearly $2 trillion in U.S. Treasury bonds in 2009 to fund stimulus programs, which led investors to fear
that demand for government debt would be insufficient, which would lower bond prices and raise the
government's borrowing costs.

Flat or humped yield curve

A flat yield curve is observed when all maturities have similar yields, whereas a humped curve results
when short-term and long-term yields are equal and medium-term yields are higher than those of the
short-term and long-term. A flat curve sends signals of uncertainty in the economy. This mixed signal
can revert to a normal curve or could later result into an inverted curve. It cannot be explained by the
Segmented Market theory discussed below.

Inverted yield curve

An inverted yield curve occurs when long-term yields fall below short-term yields. Under unusual
circumstances, long-term investors will settle for lower yields now if they think the economy will slow
or even decline in the future. An inverted curve has indicated a worsening economic situation in the
future 5 out of 6 times since 1970. The New York Federal Reserve regards it as a valuable forecasting
tool in predicting recessions two to six quarters ahead. In addition to potentially signaling an economic
decline, inverted yield curves also imply that the market believes inflation will remain low. This is
because, even if there is a recession, a low bond yield will still be offset by low inflation. However,
technical factors, such as a flight to quality or global economic or currency situations, may cause an
increase in demand for bonds on the long end of the yield curve, causing long-term rates to fall. This
was seen in 1998 during the Long Term Capital Management failure when there was a slight inversion
on part of the curve.

ANALYSIS
6
 ANALYSIS STRUCTURE

The following is the structure of analysis:

• Description
• Cause
• Analysis
• Decision
• Prediction

Yield Curve Analysis Jan – Feb 2009

Description

• The graph is upward sloping; 1st Jan graph yield is 5.7 as compared to 5.68 on 2 nd Jan for 91 day
bond & goes up to 6.64 as compared to 6.59 on 2nd Jan for 20 year bond, thus the short term yield
has increased.
• Bond with maturity of 1.05 years to 1.5 years is almost overlapping i.e. it did not see much change
in the yield during these two days. The yield roughly extended from 5.28 to 5.19.
• As evident from the curves, the gap is increasing initially but in higher maturities is again
narrowing down & remains at .0513 for 20 year bond.

7
 Maturity 1-Jan-09 2-Jan-09
Difference
(2 Jan –1st Jan)
nd

0.019178 5.688485 5.777175 0.08869

1.51506 5.1915 5.19578 0.00427
19.98348 6.59036 6.641905 0.05154
20.00265 6.591168 6.642528 0.05136

Cause

This increase in YTM (Yield to Maturity) in initial years over previous day is on account of:
• Decrease in price which is determined by market forces of demand & supply.
• Discounting factor (YTM) to be higher than the coupon of bond

The increasing YTM for higher maturity is due to decrease in price which is determined by market
forces of demand & supply.

Analysis

• At the higher maturities since the gap between the curves has narrowed , and the yields have
increased on 2nd Jan as compared to 1st Jan (evident from the table above ), thus the market price on 2nd
Jan is lower than 1st Jan. Thus if an investor bought a bond on 1st Jan, he would suffer a notional loss
as he paid a higher price but a notional gain on the yield till he sells it off.
( Note – Underlying assumption here is that the coupon yield of the bond is higher that the YTM.)

• For a long term investor it is better to buy it on 2nd Jan as he can reinvest his coupons at a higher rate,
also for such an investor price risk is minimal as he anyway doesn’t plan to sell off his investment.

• Also a higher YTM, associated with the same bonds of higher maturity on the 2nd as compared to 1st
Jan, indicates that investors assign higher risk to the same bonds and therefore demand a risk premium
in form of higher YTM however, the premium is minimal.

Decision

• Short term investor: As short term investor I would have bought bonds today (in anticipation of
current trend – increased YTM & reduced prices), thus selling the bonds when the prices increase later.
• Long term investor: As long term investor I would have bought the bonds today (in anticipation of
current trend – increased YTM & reduced prices).
• Long term vs short term bond: If given an option between long term vs short term bond, I would
chose long term bond as the price volatility increases with increase in maturity.

Prediction-
I predict the short term yield to increase over coming time period.

8
Description

• The graph is upward sloping; 7th Jan graph yield is 6.03 as compared to 4.85 on 9th Jan for 91 day
bond & goes up to 7.48 as compared to 7.2 on 9th Jan for 20 year bond, thus the short term yield has
decreased & instead the long term has increased.
• Bond with maturity of 1.57 years to 7.67 years is almost overlapping i.e. it did not see much change
in the yield during these two days. The yield roughly extended from 5.12 to 6.52.
• As evident from the curves, the gap is almost nil initially but in higher maturities is increasing &
remains at .28 for 20 year bond.

Maturity 7-jan-09 9-jan-09

Difference

(9th Jan –7th Jan)

0.019178 6.039123 4.82377 -1.2153

1.5726 5.12643 5.12642 -1.1319
7.6712 6.528574 6.528029 -0.0005
20.00265 7.200883 7.482347 0.2814

Cause

This decrease in YTM (Yield to Maturity) in initial years over previous day is on account of:
• Increase in price which is determined by market forces of demand & supply.
• Discounting factor (YTM) to be lower than the coupon of bond

9
 The increasing YTM for higher maturity is due to decrease in price which is determined by market
forces of demand & supply.

Analysis

• Continuing my previous decision, I would have gained on selling short term bond today that I bought
on 2nd Jan. also, gained a notional gain on long term bonds that I bought on 2nd Jan due to increase in
yield.

• At the higher maturities since the gap between the curves has widened, and the yields have decreased
on 9th Jan as compared to 7th Jan (evident from the table above), thus the market price on 9th Jan is
higher than 7th Jan. Thus if a short term investor bought a bond on 7th Jan, he would suffer a notional
gain as he paid a lower price but a notional loss on the yield.
(Note – Underlying assumption here is that the coupon yield of the bond is higher that the YTM.)

• For a long term investor it is better to buy it on 9th Jan as he can buy it at lower price than yesterday
but he will experience reinvestment risk.

Decision

• Short term investor: As short term investor I would have sold bonds today (in anticipation of
current trend – decreased YTM & increased prices), thus buying the bonds when the prices reduce later.
• Long term investor: As long term investor I would have bought the bonds today (in anticipation of
current trend – increased YTM & reduced prices), thus selling the bonds when the prices increase later.

Prediction-
My previous prediction of short term yield hasn’t been verified but long term yield has withstood with
respect to long term yield.
I predict the short yield to increase over coming time period looking at the previous trends.

10
Description

• The graph is upward sloping but ; 15th Jan graph yield is 5.14 as compared to 5.91 on 16 th Jan for
91 day bond & goes up to 7.41 as compared to 7.39 on 16th Jan for 20 year bond, thus the short term
yield has increased & also the long term yield but marginally.
• As evident from the curves, the gap is narrowing at maturity of 2.3 years but increases & again
narrows down for 20 year bond at -.01325.

Maturity 15-Jan-09 16-Jan-09

Difference
(16th Jan –15th Jan)
0.019178 5.1442605 5.9107285 0.7664
2.32054 5.160069 5.241857 0.0817
20.00265 7.4125017 7.3992481 -0.0132

Cause

This increase in YTM (Yield to Maturity) in initial years over previous day is on account of:
• Decrease in price which is determined by market forces of demand & supply.
• Discounting factor (YTM) to be higher than the coupon of bond

11
 The decreasing YTM for higher maturity is due to increase in price which is determined by market
forces of demand & supply.

Analysis

• As per my previous decision, I would have gained on selling short term bond on 9th Jan as the yields
have increased & prices reduced; instead buy today at lower price. Also, gained a notional gain on long
term bonds that I bought on 2nd Jan due to increase in yield.

• At the higher maturities since the gap between the curves has narrowed , and the yields have
decreased on 16th Jan as compared to 15th Jan for longer maturity (evident from the table above ), thus
the market price on 16th Jan is higher than 15th Jan for long term bond but lower for short term bond.
Thus if an investor bought a bond on 15th Jan, he would suffer a notional loss as he paid a higher
price but a notional gain on the yield till he sells it off.
( Note – Underlying assumption here is that the coupon yield of the bond is higher that the YTM.)

• For a long term investor it is better to not buy as the price has increased over previous day & yield
decreased.

Decision

• Short term investor: As short term investor I would have bought bonds today (in anticipation of
current trend – increased YTM & reduced prices), thus selling the bonds when the prices increase later.
• Long term investor: As long term investor I would have not done anything today (in anticipation
of current trend – decreased YTM & increased prices)
• Long term vs short term bond: If given an option between long term vs short term bond, I would
chose short term bond as there is some opportunity in there but none in long term bond.

Prediction-
My previous prediction of short term yield has been verified as the yield has increased from 4.8 to 5.9.
I predict the short term yield to increase over coming time period looking at the previous trends.

12
Description

• The graph is steeply sloping upwards, however the yields have decreased as compared to previous
day. The yield for 22nd Jan graph yield is 5.25 as compared to 4.71 on 23 rd Jan for 91 day bond & goes
up to 8.10 as compared to 7.35 on 23rd Jan for 20 year bond, thus the yield has decreased (except for
bonds with maturity 1.3 to 6.2 years of maturity).
• Bond with maturity of 1.38 years & 6.27 years is intersecting i.e. it did not see much change in the
yield during these two days. The yield roughly was 5.06 & 6.188 respectively.
• As evident from the curve, the gap is narrow initially but in higher maturities is increasing &
remains at -.7438 for 20 year bond.

Maturity 22-Jan-09 23-Jan-09

Difference
(23th Jan –22nd Jan)
0.019178 5.2595566 4.719973 -0.5395
1.38082 5.062589 5.061337 -0.0012
6.271206 6.1885579 6.1880478 -0.0005
20.00265 8.1011418 7.3572812 -0.7438

Cause

This decrease in YTM (Yield to Maturity) over previous day is on account of:
• Increase in price which is determined by market forces of demand & supply.
• Discounting factor (YTM) to be lower than the coupon of bond

13
Analysis

• Continuing my previous decision, I would have gained on selling short term bond today that I bought
on 16th Jan as yields have reduced in comparison to 16th Jan. Also, I further experienced notional gain
on long term bonds that I bought on 2nd Jan due to increase in yield.

• At the higher maturities since the gap between the curves has widened, and the yields have decreased
over previous day (evident from the table above ), thus the market price on 23rd Jan is higher than 22nd
Jan. Thus if an investor bought a bond on 22nd Jan, he would suffer a notional loss as his yields have
decreased but a notional gain on the price..
(Note – Underlying assumption here is that the coupon yield of the bond is higher that the YTM.)

• For a long term investor it is better to neither buy nor sell on 23rd Jan as the yields have reduced.

• Also a higher YTM, associated with the same bonds of maturity 1.3 to 6.2 years on the 23rd as
compared to 22nd Jan, can buy bonds today on account of decrease in prices.

Decision

• Short term investor: As short term investor I would have sold bonds today (in anticipation of
current trend – decreased YTM & increased prices).
• Long term investor: As long term investor I would have neither bought nor sold the bonds today
(in anticipation of current trend – decreased YTM & increased prices).
• Long term vs short term bond: If given an option between long term vs short term bond, I would
chose short term bond as there is some opportunity in there but none in long term bond.

Prediction

My previous prediction of short term yield hasn’t been verified as the yield has dropped to 4.7 as against 5.9
previously.
The current scenario is quite unpredictable.

14
Description

• The graph is steeply sloping upward; 30th Jan graph yield is 6.17 as compared to 5.85 on 23rd Jan
for 91 day bond & goes up to 7.92 as compared to 7.62 on 29th Jan for 20 year bond, thus the short
term yield has decreased but long term yield has increased.
• Bond with maturity of 7.38 years is intersecting i.e. it did not see much change in the yield during
these two days. The yield roughly was 6.75.
• As evident from the curves, the gap is increasing initially then becomes zero in middle & again
increases with higher maturities but at less pace & remains at .3048 for 20 year bond.

Maturity 29-Jan-09 30-Jan-09

Difference
(29th Jan –30th
Jan)
0.019178 5.8575625 6.1736282 0.3160
7.38353 6.753078 6.753526 0.0004
20.00265 7.622099 7.9269371 0.3048

Cause

This decrease in YTM (Yield to Maturity) in initial years over previous day is on account of:
• Increase in price which is determined by market forces of demand & supply.
• Discounting factor (YTM) to be lower than the coupon of bond

15
 The increasing YTM for higher maturity is due to decrease in price which is determined by market
forces of demand & supply.

Analysis

• As per my previous decision, I would have gained on selling short term bond on 23 rd Jan & instead
buy today at lower price on account of increase in yield. Also, experienced a notional gain on long term
bonds that I bought on 2nd Jan due to increase in yield.

• At the higher maturities since the gap between the curves has narrowed , and the yields have
increased on 30th Jan as compared to 29th Jan (evident from the table above ), thus the market price on
30th Jan is lower than 29th Jan but higher for short term bond.. Thus if an short term investor bought a
bond on 29th Jan, he would suffer a notional loss as he paid a higher price but a notional gain on the
yield till he sells it off.
( Note – Underlying assumption here is that the coupon yield of the bond is higher that the YTM.)

• For a long term investor it is better to buy it today as he can reinvest his coupons at a higher rate, also
for such an investor price risk is minimal as he anyway doesn’t plan to sell off his investment.

• Also a higher YTM, associated with the same bonds of higher maturity on the 30th as compared to
29th Jan, indicates that investors assign higher risk to the same bonds and therefore demand a risk
premium in form of higher YTM.

Decision

• Short term investor: As short term investor I would have bought bonds today (in anticipation of
current trend – increased YTM & reduced prices), thus selling the bonds when the prices increase later.
• Long term investor: As long term investor I would have bought the bonds today (in anticipation of
current trend – increased YTM & reduced prices).
• Long term vs short term bond: If given an option between long term vs short term bond, I would
chose long term bond as the price volatility increases with increase in maturity.

Prediction

I predict the short term yield to decrease over coming time period looking at the previous trends.

16
Description

• The graph is upward sloping; 5th Fen graph yield is 6.3 as compared to 4.95 on 6 th Feb for 91 day
bond & goes up to 7.73 as compared to 7.81 on 6 th Feb for 20 year bond, thus the short term yield has
decreased but long term yield has increased minimal.
• Bond with maturity of 2.85years is intersecting i.e. it did not see much change in the yield during
these two days. The yield roughly was 5.29.
• As evident from the curves, the gap is increasing narrow throughout & remains at .0797 for 20
year bond.

Maturity 5-Feb-09 6-Feb-09

Difference
(6th Feb –5th Feb)
0.019178 6.393166 4.953777 -1.4393
2.85752 5.29824 5.29606 -0.0021
20.00265 7.739657 7.819452 0.0797

Cause

This decrease in YTM (Yield to Maturity) in initial years over previous day is on account of:
• Increase in price which is determined by market forces of demand & supply.
• Discounting factor (YTM) to be lower than the coupon of bond

17
 The increasing YTM for higher maturity is due to decrease in price which is determined by market
forces of demand & supply.

Analysis

• Continuing my previous decision, I would have gained on selling short term bond that I bought on
30th Jan on account of increase in prices due to decreased yield. Also, I experienced a notional gain on
long term bonds that I bought on 2nd Jan due to increase in yield. But notional loss on long term bond
that I bought on 30th Jan as the yield is comparatively lower.

• At the higher maturities since the gap between the curves is narrow, and the yields have increased on
over previous day (evident from the table above ), thus the market price on 6th Feb is lower than 5th Feb.
Thus if an long term investor bought a bond on 5th Feb, he would suffer a notional loss as he paid a
higher price but a notional gain on the yield till he sells it off. If however, short term investor bought a
bond yesterday , then he would have experienced gain by selling bond today.
(Note – Underlying assumption here is that the coupon yield of the bond is higher that the YTM.)

• For a long term investor it is better to buy as prices have reduced on 6th Feb as he can reinvest his
coupons at a higher rate, also for such an investor price risk is minimal as he anyway doesn’t plan to
sell off his investment.

• Also a higher YTM, associated with the same bonds of higher maturity on the 6th as compared to 5th
Jan, indicates that investors assign higher risk to the same bonds and therefore demand a risk premium
in form of higher YTM however, the premium is minimal.

Decision

• Short term investor: As short term investor I would have sold bonds today (in anticipation of
current trend – decreased YTM & increased prices).
• Long term investor: As long term investor I would have bought the bonds today (in anticipation of
current trend – increased YTM & reduced prices).
• Long term vs short term bond: If given an option between long term vs short term bond, I would
chose long term bond as the price volatility increases with increase in maturity.

Prediction

My previous prediction of short term yield has withstood as the yield has dropped to 4.9 as against 6.1.
I predict the short term yield to decrease over coming time period looking at the previous trends.

18
Description

• The graph is upward sloping; 12th Feb graph yield is 9.13 as compared to 4.69 on 13 th Feb for 91
day bond & goes up to 7.88 as compared to 7.78 on 13th for 20 year bond, thus the yield has
decreased.
• Bond with maturity of 1.05 years to 1.5 years is almost overlapping i.e. it did not see much change
in the yield during these two days. The yield roughly extended from 5.28 to 5.19.
• As evident from the curves, the gap is increasing initially but in higher maturities is almost
overlapping & remains at -.1009 for 20 year bond.
• A very important observation is that the graph is inverted i.e. the short term yield is higher than the
long term yield. This might be an indication of:
 decrease in interest rates
 economic slowdown

Maturity 12-Feb-09 13-Feb-09

Difference
(13th Feb –12th Feb)
0.019178 9.13900892 4.69718284 -4.4418
12.5232 7.209801 7.204192 -0.0056
15.0356 7.469849 7.460127 -0.0097
20.00265 7.88976664 7.78880557 -0.1009

Cause

This decrease in YTM (Yield to Maturity) over previous day is on account of:
19
 • Increase in price which is determined by market forces of demand & supply.
• Discounting factor (YTM) to be lower than the coupon of bond

Analysis
• Continuing my previous decision, I would have gained more on selling short term bond today instead
of 6th Feb as the yields have reduced further. Also, I experienced a notional gain on long term bonds
that I bought on 2nd Jan & 6th Feb due to increase in yield. But notional loss on long term bond that I
bought on 30th Jan as the yield is comparatively lower.

• At the higher maturities since the gap between the curves has narrowed , and the yields have
decreased over previous day (evident from the table above ), thus the market price on 13th Feb is higher
than 12th Feb. Thus if a long term investor bought a bond on 12th Feb, he would suffer a notional loss
as the yields have reduced. But for a short term investor, he would have gained a lot due to increase in
prices if sells the bod today that he bought on 12th Feb.
( Note – Underlying assumption here is that the coupon yield of the bond is higher that the YTM.)

• For a long term investor it is better to neither buy nor sell on 13th Feb as the yields have reduced.

Decision

• Short term investor: As short term investor I would have sold any previous bonds today (in
anticipation of current trend – decreased YTM & increased prices).
• Long term investor: As long term investor I would have neither bought nor sold today (in
anticipation of current trend – decreased YTM & increased prices).
• Long term vs short term bond: If given an option between long term vs short term bond, I would
chose long term bond as the price volatility increases with increase in maturity.

Prediction

My previous prediction of short term yield has withstood as the yield has dropped to 4.6 as against 4.9.
I predict the short term yield to decrease over coming time period looking at the previous trends.

20
Description

• The graph is upward sloping; 18th Feb graph yield is 4.61 as compared to 4.32 on 19 th Feb for 91
day bond & goes up to 7.52 as compared to 7.79 on 19 th Feb for 20 year bond, thus the yield has
increased.
• Bond with maturity of 3.66 & 7.8 years are intersecting i.e. it did not see much change in the yield
during these two days. The yield roughly was 5.68 & 6.7 respectively.
• As evident from the curves, the gap is initially narrow but is increasing in higher maturities &
remains at .272 for 20 year bond.

Maturity 18-Feb-09 19-Feb-09

Difference
(18th Feb –19th Feb)
0.019178 4.61318404 4.32450254 -0.2886
3.663 5.687086 5.688773 0.0016
7.805446 6.77537603 6.77413648 -0.0012
20.00265 7.5225202 7.79456709 0.2720

Cause

This increase in YTM (Yield to Maturity) over previous day is on account of:
• Decrease in price which is determined by market forces of demand & supply.
21
 • Discounting factor (YTM) to be higher than the coupon of bond
Analysis

• Continuing my previous decision, I would have gained more on selling short term bond today instead
of 13th Feb as the yields have reduced further. Also, I experienced a notional gain on long term bonds
that I bought on 2nd Jan & 6th Feb due to increase in yield. But notional loss on long term bond that I
bought on 30th Jan as the yield is comparatively lower.

• At the higher maturities since the yields have increased over previous day (evident from the table
above ), thus the market price on 19th Feb is lower than 18th Feb. Thus if a long term investor bought a
bond on 18th Feb, he would suffer a notional gain as the yields have increased. But for a short term
investor, he would have gained due to increase in prices but a notional loss due to reinvestment risk.
(Note – Underlying assumption here is that the coupon yield of the bond is higher that the YTM.)

• For a long term investor it is better to buy on 19th Feb as the yields have increased & prices reduced.

Decision

• Short term investor: As short term investor I would have sold any previous bonds today (in
anticipation of current trend – decreased YTM & increased prices).
• Long term investor: As long term investor I would have bought (in anticipation of current trend –
increased YTM & reduced prices).
• Long term vs short term bond: If given an option between long term vs short term bond, I would
chose short term bond as there is some opportunity in there to trade but none in long term bond.

Prediction

My previous prediction of short term yield has withstood as the yield has dropped to 4.3 as against 4.6.
I predict the short term yield to decrease over coming time period looking at the previous trends.

22
Description

• The graph is upward sloping; 26th Feb graph yield is 4.84 as compared to 4.87 on 27 th Feb for 91
day bond & goes up to 8.19 as compared to 7.99 on 27 th Feb for 20 year bond, thus the yield has
decreased for higher maturities.
• Bond with maturity of 2.45 years is intersecting i.e. it did not see much change in the yield during
these two days. The yield roughly was 5.43.
• As evident from the curves, the gap is increasing initially but in higher maturities is narrowing
down &remains at -.1993 for 20 year bond.

Maturity 26-Feb-09 27-Feb-09

Difference

(27th Feb –26th Feb)

0.019178 4.84854871 4.87232889 0.0237
2.45478 5.43643 5.436422 -.00001
20.00265 8.19336123 7.99399798 -0.1993

Cause

This decrease in YTM (Yield to Maturity) in latter years over previous day is on account of:
• Increase in price which is determined by market forces of demand & supply.
• Discounting factor (YTM) to be lower than the coupon of bond
23
Analysis

• Continuing my previous decision, I would have gained by selling short term bond on 19th Feb. Also,
I experienced a notional gain on long term bonds that I bought on 2 nd Jan, 30th Jan & 6th Feb due to
increase in yield.

• At the higher maturities since the gap between the curves has narrowed, and the yields have decreased
over previous day (evident from the table above), thus the market price on 27th Feb is higher than 26th
Feb. Thus if a long term investor bought a bond on 26th Feb, he would suffer a notional loss as the
yields have reduced. But for a short term investor, he would have suffered a notional loss as he paid a
higher price on 26th Feb as compared to 27th Feb.
( Note – Underlying assumption here is that the coupon yield of the bond is higher that the YTM.)

• For a long term investor it is better to neither buy nor sell on 27th Feb as the yields have reduced.

Decision

• Short term investor: As short term investor I would have bought bonds today (in anticipation of
current trend – increased YTM & reduced prices) & sold later when prices increased.
• Long term investor: As long term investor I would have neither bought nor sold today (in
anticipation of current trend – reduced YTM).
• Long term vs short term bond: If given an option between long term vs short term bond, I would
chose short term bond as there is some opportunity in there to trade but none in long term bond.

Prediction

My previous prediction of short term yield hasn’t withstood as the yield has increased from 4.6 to 4.8.
I still predict the short term yield to decrease over coming time period looking at the previous trends.

24
 Yield Curve Analysis March – April 2009

5 March- 6 March 2009

10.5

9.5
Description

 The yield on short term bonds, was higher for 5th March ’09 at 5.88%, it fell down to 5.24% on 6th
March ’09.
 Bond with maturity of 1.07 years did not see any change in the yield during these two days, as
8.5
clearly seen from the intersecting curves. The yield stood at 5.27%.
 For Bonds with maturity of 1.39 yrs, the yield on the two days is almost the same, its 5.32% on 5th
Spot interest rates

March while it fell down marginally to 5.31% on 6th Mar.

 As evident from the curves, the gap between the curves keeps on widening with the increase in
maturity period.

7.5
5 th th
6 March
Difference
(6th Mar. –
Maturity March ‘09 ‘09 5th Mar)

19.9451 8.32891 9.834068

2 7 6 1.505152
8.33011 9.837585
19.9643 6.5
2 4 1.507474

19.9834
8
8.33130
4 5 5.24
9.841098
1.509794

20.0026
8.33249
5 9
5.88
9.844607 1.512113

5.5 25
 5

Analysis – Cause, Decision and Prediction

 At the higher maturities since the gap between the curves has widened, and the yields have
increased on 6th Mar. as compared to 5th Mar. (increased by 1.51% for a 20 yrs bond), thus the
market price on 6th mar is lower than the mkt. price on 5th mar (As discounting is done at a higher
rate on 6th). Thus if an investor bought a 20 yrs bond on 5th mar, he would suffer a notional loss as
he paid a higher price.
Note – Underlying assumption here is that the coupon yield of the bond is higher that the YTM.
 For a long term investor it is better to buy it on 6th mar as he can reinvest his coupons at a higher
rate, also for such an investor price risk is minimal as he anyway does’nt plan to sell off his
investment.
 Also a higher YTM, associated with the same bonds of higher maturity on the 6th as compared to 5th
mar, indicates that investors assign higher risk to the same bonds and therefore demand a risk
premium in form of higher YTM.

12 March- 13 March 2009

P lot of the Estimated ZC YC

12-M a r-09 13 -M a r-09

8 .7 1

7
Spot interest rates

6 .1 3

5
4 .7 2

4
15

18

20
0.4

2.7
0.02

0.79
1.17

1.94
2.32

3.09
3.47
3.85
4.24

5.01

5.77
6.16

6.92
7.31

8.07

9.22

9.99
10.4

11.1

11.9
12.3

13.1
13.4
13.8
14.2

15.4

16.1
16.5
16.9
17.3

18.4

19.2
19.6
1.55

4.62

5.39

6.54

7.69

8.46
8.84

9.61

10.8

11.5

12.7

14.6

15.7

17.7

18.8

M a tur ity (ye a rs )

Description

12-Mar- 13-Mar- Difference( 1

Maturity 09 09 3 mar – 12 mar)
0.01917 4.69452
8 6 3.521892 -1.17263
0.03835 4.70147 3.547936
6 7 5 -1.15354
3.70135
0.05753 6.13160
4.70845 6.493713
3.573834 0.36211
4 23 1 -1.13462
1.78 5.38 5.38 0 26
 3.72053 6.13851 6.501366
2 6 7 0.362851
7.13 7.17 7.17 0
20 8.71 6.13 -2.58

■ For maturity less than 1.78 yrs. The YTM on 12 mar is higher than YTM on 13 mar.
■ At 1.78 yrs the yield on both the days is the same at 5.38%.
■ For maturities, greater than 1.78 yrs but less than 7.13 yrs, the YTM on 13 mar is greater than on 12
mar.
■ Again the two yield curves intersect at 7.13 yrs maturity is 7.17%.
■ After 7.13 yrs the YTM on 12 mar is greater than YTM on 13 mar.

Analysis –Cause, Decision and Prediction

■ 12 mar YTM is greater than 13 mar YTM for every maturity greater than 7.13 years. In a matter of
one day the yield fell by 2.58%.
■ When the interest rates fall, there is a price advantage but a reinvestment advantage. Thus an
investor who already owns a 20 yrs bond, will be at a profit so sell it on 13 mar, as he can fetch a
higher price for his bond. Also since the interest rates have fallen, the investor would be able to
reinvest the coupons at a lower rate, thus it is better to sell the bond now and garner the profit in
form of higher price.
■ In case of a zero coupon bond, since the investor does not get coupons and hence there is no
reinvestment. Thus a zero coupon bond holder does not suffer any reinvestment risk, when the
interest rates fall.
■ Prediction – There is a strong indication that the interest rates might fall further given the steep fall
of 2.58% that happened in just two days. Thus a short term investor even if he buys on the 13th mar,
can make a profit by selling his bond at a higher price on further days when the interest rates fall
further.

19 March – 20 March 2009

Plot of the E stimated ZCYC

19-M a r-09 20-M a r-09

10

8 .1 8
9

8 .2 1
Spot interest rates

7 7 .3 4

5 .6 5

4
15

18

20
0.4

2.7
0.02

0.79
1.17
1.55
1.94
2.32

3.09
3.47
3.85
4.24
4.62
5.01
5.39
5.77
6.16
6.54
6.92
7.31
7.69
8.07
8.46
8.84
9.22
9.61
9.99
10.4
10.8
11.1
11.5
11.9
12.3
12.7

13.4
13.8
14.2
14.6

15.4
15.7
16.1
16.5
16.9
17.3
17.7

18.4
18.8
19.2
19.6
13.1

M a turity (ye a rs )

27
 Description
■ For short term maturities the YTM falls from 19th mar to 20th mar.
■ For a bond for 3.62 yrs of maturity, the yield on both the days are the same at 6.37%.
■ For bonds of maturity 4.33 yrs upto 10 yrs it increases from 19 to 20 mar
■ From 11 yrs onwards, the yields are almost the same, as evident from overlapping curves at the
latter part, for the two days.

19- 20-
Maturity Mar Mar
7.3 5.6
0.03 9 4
1.38 6.6 5.9
6.3 6.2
2.87 6 2
6.3 6.3
3.62 7 7
6.5
4.33 6.5 1
8.5 8.6
7.21 7 3
8.2 8.2
11 1 1

Analysis –Cause, Decision and Prediction

■ For short term bonds the yield has fallen, the reason for this might be the willingness of investors to
put in money in these instruments. They rate these instruments safe and therefore do not demand
that high a risk premium.it.
■ For short term bonds since the yield has fallen, discounting is being done at a lower rate, thus the
market price of the bond will increase. Hence a short term investor currently holding the bond can
sell the bond on 20th at a higher price and garner the profit.
■ Prediction 1 – Given a steep fall in the yield of short term bond in a matter of one day, I predict
that the interest rates for short term bonds may decrease further, riding on investor confidence. Thus
the investor should hold his investment for a few more days as he will be able to get a higher price.
■ Prediction 2 - Also a person who plans to buy the bond with shorter maturity should buy it as soon
as possible, otherwise he will have to pay a higher price.
■ As the maturity increases there is hardly a difference between the yields, the reason for this might
be a stable market conditions and investor sentiments.
■ For an investor looking forward to invest in longer maturities he can be indifferent towards when to
invest given the same yield, as evident fro the overlapping curves.

28
 25 March – 26 March 2009
Plot of the Estimated ZCYC

25-Mar-09 26-Mar-09

9.5

8.5
8.20

8.27
Spot interest rates

7.5

6.5

5.5

4.72

4.79
4.5
0.02

0.79
1.17

1.94
2.32

3.09

3.85
4.24

5.01
5.39
5.77
6.16
6.54
6.92
7.31
7.69
8.07
8.46
8.84
9.22
9.61
9.99
10.4
10.8
11.1

11.9
12.3
12.7
13.1

13.8
14.2

15
15.4

16.1

16.9
17.3

18
18.4

19.2

20
0.4

1.55

2.7

3.47

4.62

11.5

13.4

14.6

15.7

16.5

17.7

18.8

19.6
Maturity (years)

Description
■ For maturity Less than a year, the yield has fallen from 25th to 26th mar.

Duration 25 Mar ‘09 26 Mar ‘09

0.11 yrs 4.79% 4.70%

■ For maturity of 0.268 yrs there is a overlap in the yields at 4.82%.

■ After this point there is an increase in yield, but this increase is at a decreasing rate (except at a few
points), this trend continues till 13.5 years.

25- 26- %
Maturity Mar Mar Change
5.1 5.5 6.75675
1.52 8 3 7
5.4 5.9 7.65027
2.3 9 1 3
5.9 6.4 8.89261
3.54 6 9 7
6.4 6.9 6.77966
5.1 9 3 1
7.1 7.4 3.92706
7.63 3 1 9
29
 7.6 2.13333
9.76 7.5 6 3
7.7 7.8 1.29701
11.48 1 1 7
7.8 7.9 0.76433
12.96 5 1 1

■ After 13.5 years of maturity, the yield increases on 26th mar as compared to 25th mar, the curves for
the two days again overlap at about 16 yrs. The yield again starts falling - At 20 yrs of maturity the
yield stands at 8.27% on the 25th mar and falls down to 8.20% on the 26th mar.

Analysis –Cause, Decision and Prediction

■ For bonds with short term maturity, the yields have fallen, thus discounting at a lower rate, hence
there is a price advantage, if the investor sells his bond on the 26th mar he can garner a profit in form
of higher market price of the bond.
■ Prediction 1 – It is expected that the interest rates would fall further, if this happens the investor
would be at an advantage if he holds the short term bond for some more time, as he would be able
to sell it at a higher price.
■ For the mid term maturities, the yield increases and the trend continues till bonds of 13.5 yrs. Thus
there is a reinvestment advantage as the investor will be able to reinvest the coupons at a higher
rate. But there is a price risk as discounting done at a higher rate thus a price risk, as the market
price of the bond will fall.
■ Prediction 2 – An investor holding mid term maturity bond should hold the bond and reinvest the
coupons at the higher yield rather than selling the bond, as the market price would have fallen.
■ For the long term maturity of 20 yrs the yield has fallen to 8.2% from 8.27%, thus there is a
reinvestment loss for the long term investor who doesn’t intend to sell his bonds. Now such an
investor would have to reinvest the coupons at a lower rate.
■ Prediction 3 – It is expected that the interest rates on long term maturities would fall further, as the
investor sentiments are stabilizing, the economy is getting out of recession and thus investors wont
command as much risk premium. Thus if the investor wants to get the advantage of increase in the
market price, he should buy the bond as early as possible and sell it later when the yields fall further
and the market price has risen.

31st March – 2nd April 2009

30
 Plot of the Estimated ZCYC

31-Ma r-09 2-Apr-09

8.17
8.5

7.5

6.5
Spot interest rates

5.5 6.1 5

4 .69

4.5

3.96

3.5

2.5
0.4

15

18

20
2.7
0.02

2.32

4.62
5.01

7.31

9.22
9.61
9.99

11.5

14.2

15.7

16.5
16.9

18.4

19.2
0.79
1.17
1.55
1.94

3.09
3.47
3.85
4.24

5.39
5.77
6.16
6.54
6.92

7.69
8.07
8.46
8.84

10.4
10.8
11.1

11.9
12.3
12.7
13.1
13.4
13.8

14.6

15.4

16.1

17.3
17.7

18.8

19.6
Maturity (years)

Description
■ Short term yields have increased, from 3.96% to 4.69%.
■ There is an overlap at 1.49 yrs, the yield is 5.37%.
■ Thereon the yield falls, but there is again an overlap at 7.61 yrs (At this point the yield is 7.19%).
■ The yield then increases. It stands at 8.17% on 2nd apr as compared to 6.15 % on 31st mar, for a 20
yrs bond.

Analysis –Cause, Decision and Prediction

■ Since the short term yields have increased, now the discounting will be at a higher rate, thus the
market price will fall. Hence an investor who wishes to buy the bond should buy it at a later date
when the yields have further increased, as he will have to pay a lower price.
■ A long term investor should hold the bond, as he will be able to reinvest the coupons at a higher
rate.

■ As the yields have increased for long term, an investor with a long term investment horizon, should
hold onto his investment as he will be able to reinvest the coupons at a higher rate.
■ Prediction 1 – Rates of long term bonds are expected to increase further, as investors tend to
demand a higher risk premium for putting in there money for a longer duration. Thus a person with
long term invt. Horizon should buy the bond at a later rate when yields have risen significantly, as
then the price would have fallen plus he will be able to reinvest the coupons at a higher rate.
■ Prediction 2 - A person who intends to sell off the bond of long term maturity should sell as soon
as possible, otherwise price may fall further.

8th April – 9th April 2009

31
 Plot of the Estimated ZCYC

8-Apr-09 9-Apr-09

9.5

8.19
8.5 9.17

7.5
Spot interest rates

6.5

5.5
5.37

4.55

4.5

3.5
0.02

0.79
1.17

1.94
2.32

3.09

3.85
4.24

5.01
5.39
5.77
6.16
6.54
6.92
7.31
7.69
8.07
8.46
8.84
9.22
9.61
9.99
10.4
10.8
11.1

11.9
12.3
12.7
13.1

13.8
14.2

15
15.4

16.1

16.9
17.3

18
18.4

19.2

20
0.4

1.55

2.7

3.47

4.62

11.5

13.4

14.6

15.7

16.5

17.7

18.8

19.6
Maturity (years)

Description
■ Short term yield have fallen as compared to 9th apr.
■ There is an overlap at 7.59 yrs (yield 7%) to 9.2 yrs ( yield 7.3%).
■ Long term yield has fallen. For a 20 yrs bond it has fallen from 9.17% to 8.19%.

Analysis –Cause, Decision and Prediction

■ Since the short term yields have fallen, it indicates the market price of the bond will increase as
discounting at a lower rate.
■ Mid term maturity bonds have similar yields on both the days indicating same risk preposition
associated with these bonds.
■ Prediction 1 - It is expected that the interest rates would fall further, if this happens the investor
would be at an advantage if he holds the short term bond for some more time, as he would be able
to sell it at a higher price.
■ Prediction 2 – It is expected that the interest rates on long term maturities would fall further, as the
investor sentiments are stabilizing, the economy is getting out of recession and thus investors wont
command as much risk premium. Thus if the investor wants to get the advantage of increase in the
market price, he should buy the bond as early as possible and sell it later when the yields fall further
and the market price has risen.

16th April – 17th April 2009

32
 Plot of the Estimated ZCYC

16-Apr-09 17-Apr-09

9.5

8.5
7.94

7.5
7.97
Spot interest rates

6.5

5.5
5.05

5.02

4.5

3.5
0.4
0.79
1.17

1.94
2.32
2.7
3.09

3.85
4.24

5.01

5.77
6.16

6.92

7.69
8.07

8.84
9.22

9.99

10.8
11.1

11.9
12.3
12.7

13.4
13.8
14.2
14.6
15
15.4
15.7

16.5

17.3
17.7
18
18.4
18.8
19.2
19.6
20
0.02

1.55

3.47

4.62

5.39

6.54

7.31

8.46

9.61

10.4

11.5

13.1

16.1

16.9
Maturity (years)

Description
■ Both the curves are almost overlapping, there is hardly a difference in the yields on both the days.
■ Short term yields have increased from 5.02% to 5.05%.
■ Long term yields have fallen from 7.97% to 7.94%. (20 yrs bond)
■ Mid term yields have fallen marginally, though the graph gives an overlapping look.

Analysis -Cause and Prediction

■ Short term maturity bonds have similar yields on both the days indicating same risk preposition
associated with these bonds.
■ Prediction 1 – There is a minor increase in YTM for short term bonds, from 5.02% to 5.05%. I feel
the yields might increase further, as a result of which the market price of the bond would fall, thus a
short term investor should sell the bond as soon as possible otherwise he will be exposed to higher
price risk.
■ Prediction 2 – For mid term maturity the yields have fallen marginally. It is expected the yields
would fall further, thus the market price of the bond will rise. Thus an investor if plans to buy such
bond, should buy as soon as possible. While a person looking forward to sell his bond should hold
onto it for a longer term to get higher price advantage.
■ Prediction 3 - – It is expected that the interest rates on long term maturities would fall further, as
the investor sentiments are stabilizing, the economy is getting out of recession and thus investors
wont command as much risk premium. Thus if the investor wants to get the advantage of increase in
the market price, he should buy the bond as early as possible and sell it later when the yields fall
further and the market price has risen.

23rd April – 24th April 2009

33
 Plot of the Estimated ZCYC

23-Apr-09 24-Apr-09

8
7.56

7.75
7
Spot interest rates

5
4.58

3.60

3
0.02
0.4

1.17
1.55

2.32
2.7

3.47
3.85

4.62
5.01

5.77
6.16

6.92
7.31
7.69
8.07
8.46

9.22
9.61

10.4
10.8
11.1
11.5
11.9

12.3
12.7

13.4
13.8

14.6
15
15.4
15.7
16.1

16.9
17.3

18
18.4

19.2
19.6
20
0.79

1.94

3.09

4.24

5.39

6.54

8.84

9.99

13.1

14.2

16.5

17.7

18.8
Maturity (years)

Description
■ Short term yield have increased to 4.58% from 3.6% Though as the maturity increases the gap in
the yield for the two days falls.
■ There is an overlap at 7.71 yrs. At 6.52% of maturity.
■ After the overlap for long term maturity, there is a decrease in the yield. For a 20 yrs bond it has
fallen from 7.75% to 7.56%.

Analysis –Cause, Decision and Prediction

■ Since the short term yields have increased, now the discounting will be at a higher rate, thus the
market price will fall. Hence an investor who wishes to buy the bond should buy it at a later date
when the yields have further increased, as he will have to pay a lower price.
■ Prediction 1 – For mid term maturity the yields have fallen marginally. It is expected the yields
would fall further, thus the market price of the bond will rise. Thus an investor if plans to buy such
bond, should buy as soon as possible. While a person looking forward to sell his bond should hold
onto it for a longer term to get higher price advantage.
■ Prediction 2 – It is expected that the interest rates on long term maturities would fall further, as the
investor sentiments are stabilizing, the economy is getting out of recession and thus investors wont
command as much risk premium. Thus if the investor wants to get the advantage of increase in the
market price, he should buy the bond as early as possible and sell it later when the yields fall further
and the market price has risen.
.

Yield Curve Analysis of May- June 2009

34
 9
Description

 The graph is upward sloping; The yield increases from 3.22% to 8.012% for a maturity period of
0.019 years to 20 years on 7th May and 4.173% to 7.756% on 8th May for the same maturity.
 Bond with maturity of 4.31 years are intersecting i.e. they did not see much change in the yield
during these two days. The yield roughly was 5.7489%. The yield on bonds with a maturity period
greater than 4.29 years is higher on 8th May as compared to 7th May.
 As evident from the curves, the gap is initially increasing but is almost constant for higher
maturities.

Maturity 7-May-09 8-May-09

8 Difference

(8th May–7th May)

0.019178 4.173272 3.2224947 -0.95078
4.31505 5.741781 5.74153 -0.00025
20.00265 7.756964 8.0122414 0.255277

Analysis

• At the higher maturities since the yields have increased on 8th May as compared to 7th May, thus the
market price on 8th May is lower than 7th May. Thus if an investor bought a bond on 7th May, he would
suffer a notional loss as he paid a higher price
( Note – Underlying assumption here is that the coupon yield of the bond is higher that the YTM.)
7
35
• For a long term investor it is better to buy it on 8th May as he can reinvest his coupons at a higher
rate, also for such an investor price risk is minimal as he anyway doesn’t plan to sell off his investment.

• Also a higher YTM, associated with the same bonds of higher maturity on the 8th as compared to 7th
May, indicates that investors assign higher risk to the same bonds and therefore demand a risk
premium in form of higher YTM however, the premium is minimal.

Decision

• Short term investor: As short term investor I would have sold shorter maturity bonds that I
bought in the past when the yield was higher or bought higher maturity bonds today (in
anticipation of current trend). But since the yield on higher maturity bonds hasn’t shown extreme or
increasing gaps, the buying of bonds should be on a cautious note.
• Long term investor: As long term investor I would have bought the bonds today (in anticipation of
current trend – increased YTM & reduced prices), thus selling the bonds when the prices increase later.

Prediction
I predict the short yield to increase over coming time period looking at the previous trends.

Description

 The graph is upward sloping; The yield increases from 3.394% to 8.153% for a maturity period of

9
0.019 years to 20 years on 14th May and 3.289% to 7.868 on 15th May for the same maturity.
 Bond with maturity of 0.49 and 9.704 years are intersecting i.e. they do not see much change in the
yield during these two days. The yield roughly was 3.77% and 7.23% respectively.
 As evident from the curves, the two curves are extremely close to each other for most of the length
and hence not much gap can be found between them.

Maturity 14-May-09 15-May-09

36
 0.019178 3.394914 3.2899622 -0.10495
0.498628 3.778992 3.7792601 0.000268
9.704068 7.229986 7.2302772 0.000291
20.00265 8.153571 7.868426 -0.28514

Analysis

• At the higher maturities since the yields have decreased on 15th May as compared to 14th May, thus
the market price on 15th May is higher than 14th May. Thus if an investor bought a bond on 15th May,
he would suffer a notional gain as he paid a lower price
( Note – Underlying assumption here is that the coupon yield of the bond is higher that the YTM.)

• For a long term investor it is better not to buy it on 15th May as he can reinvest his coupons only at a
lower rate, also for such an investor price risk is minimal as he anyway doesn’t plan to sell off his
investment.

• Also a lower YTM, associated with the same bonds of higher maturity on the 15th as compared to 14th
May, indicates that investors assign lower risk to the same bonds and therefore are ready to give a
discount in the form of lower YTM.

Decision

• Long term investor: As long term investor I would have sold the bonds today that I bought
recently when the yield was higher (in anticipation of current trend – decreased YTM & higher
prices).
• Short term investor: As short term investor I would have sold bonds today whether higher
maturity or lower because the yield has decreased in both the cases.(in anticipation of current
trend). This is on the assumption that the coupon rate is greater than YTM. In case it is otherwise things
would have been reverse.

Prediction

Though the prediction in the previous week did not stand out to be correct, I predict the short yield to
increase over coming time period looking at the previous trends.

37
 12
Description

 The graph is upward sloping; The yield increases from 4.882% to 9.038% for a maturity period of
0.019 years to 20 years on 21st May and 5.631% to 7.068% on 22nd May for the same maturity. As
the yield curve on 21st is steeper than 22nd , there is a greater percentage change in yield with
maturities on 21st as compared to 22nd.
 Bond with maturity of 7.74791 years are intersecting i.e. they do not see much change in the yield
11
during these two days. The yield roughly was 6.52%.
 The gap between the two curves initially reduces till 7.74791 years and then increases for higher
maturities with the difference being 1.9703% for 20 years.

Maturity 21-May-09 22-May-09

Difference

(22nd May–21st
May)
0.019178
7.747912
20.00265
10 4.882516
6.526095
9.038358
5.630841
6.5293797
7.0680596
0.019178
0.003284
-1.9703

Analysis

• Continuing my previous decision, I would have lost by selling long term bonds on 22nd May. Also, I
experienced a notional gain on long term bonds that I bought on 8th May and 15th May due to decrease
in yield.
9 38
• At the higher maturities since the gap between the curves has broadened, and the yields have
decreased over previous day (evident from the table above), thus the market price on 22nd May is higher
than 21st May. Thus if a long term investor bought a bond on 21st May, he would suffer a notional
gain as the yields have reduced. But for a short term investor, he would have suffered a notional loss as
he paid a higher price on 21st May as compared to 22nd May.
( Note – Underlying assumption here is that the coupon yield of the bond is higher that the YTM.)

• For a long term investor it is better to sell on 22nd May as the yields have reduced.

Decision

• Short term investor: As short term investor I would have bought shorter maturity bonds that or
sold higher maturity bonds today (in anticipation of current trend).
• Long term investor: As long term investor I would have sold the bonds today that I bought
recently when the yield was higher (in anticipation of current trend – decreased YTM & higher
prices).

Prediction
My previous prediction of short term yield hasn’t withstood as the yield have reduced.
I predict the short term yield to decrease over coming time period looking at the previous trends.

Description
12
 The graph is upward sloping; The yield increases from 4.498% to 8.049% for a maturity period of
0.019 years to 20 years on 28th May and 5.102% to 8.4302% on 29th May for the same maturity.
 Though the curves are fairly close to each other for the middle portion of the maturities, it can be
seen that bonds with maturity of 4.25 and 10.988 years are intersecting i.e. they do not see much
change in the yield during these two days. The yield roughly was 6.201% and 7.42% respectively.

11 39
 The gap between the two curves is very less for the middle portion of the curve but increases with
increasing maturities after 10.988 years of maturity.

Maturity 28-May-09 29-May-09

Difference

(29th May–28th
May)
0.019178 4.497984 5.1023317 0.604347
4.257516 6.201082 6.2012034 0.000122
10.98899 7.420771 7.4211486 0.000378
20.00265 8.049028 8.4302488 0.381221

Analysis

• Continuing my previous decision, I would have lost by selling short term bond on 29th May. Also, I
experienced a notional loss on long term bonds that I bought on 8th May, 15th May & 22nd May due to
increase in yield.

• At the higher maturities since the gap between the curves has broadened, and the yields have
increased over previous day (evident from the table above), thus the market price on 29th May is lower
than 28st May. Thus if a long term investor bought a bond on 28th May, he would suffer a notional
loss as the yields have increased. This is true even for a short term investor.
( Note – Underlying assumption here is that the coupon yield of the bond is higher that the YTM.)

• For a long term investor it is better to buy bonds on 29th May as the yields have increased a lot in
comparison to the previous days of this month.

Decision

• Short term investor: As short term investor I would have bought bonds today (in anticipation of
current trend – increased YTM & reduced prices) & sold later when prices increased.
• Long term investor: As long term investor I would have bought the bonds today (in anticipation of
current trend).But since the gap is not too great even for higher maturities, buying should be on a
cautious note.

Prediction

My previous prediction of short term yield hasn’t withstood as the yield has increased.
I still predict the short term yield to decrease over coming time period looking at the previous trends.

40
Description 12
 The graph is upward sloping; The yield increases from 4.137% to 7.990% for a maturity period of
0.019 years to 20 years on 4th June and 4.4636% to 7.9687% on 5th June for the same maturity.
 Though the curves are fairly close to each other for most of the length of the curve and they almost
overlap for a long distance
 The gap between the two curves is very less for almost the entire length after decreasing initially.
Thus it can be concluded that the customer expectations did not change much between these two
days..
11
Maturity 4-June-09 5-June-09
Difference

(5th June–4th
June)
0.019178 4.137319 4.4636097 0.32629
20.00265 7.990921 7.9687873 -0.02213

Analysis
10
• Continuing my previous decision, I would have lost by selling short term bond on 19th Feb. Also, I
experienced a notional gain on long term bonds that I bought on 8th May and 29th May due to decrease
in yield.

• At the higher maturities since the gap between the curves is only marginal and the yields have

9
decreased over previous day (evident from the table above), thus the market price on 5th June is higher
than 4th June. Thus if a long term investor bought a bond on 4th June, he would suffer a notional gain
41
as the yields have reduced but the gain would have been really low. But for a short term investor, he
would have suffered a notional loss as he paid a higher price on 4th June as compared to 5th June.
( Note – Underlying assumption here is that the coupon yield of the bond is higher that the YTM.)

• For a long term investor it is better to neither buy nor sell on 5th June as the yields curve doesn’t
change much during the two days so no accurate conclusion can be drawn about the future movement
of the market.

Decision

• Short term investor: As short term investor I would have bought bonds today (in anticipation of
current trend – increased YTM & reduced prices) & sold later when prices increased. Also since
nothing conclusive can be said about the price movement of the long term bond, it is not advisable to
buy or sell them.
• Long term investor: As long term investor I would have neither bought nor sold today (in
anticipation of current trend).

Prediction

My previous prediction of short term yield has withstood as the yield have decreased.
I still predict the short term yield to decrease over coming time period looking at the previous trends.

42
Description 12
 The graph is upward sloping; The yield increases from 4.0625% to 7.8779% for a maturity period
of 0.019 years to 20 years on 11th June and 4.6384% to 8.2239% on 12th June for the same maturity.
 Though the curves are fairly close to each other, it can be seen that bonds with maturity of 1.76 and
9.032 years are intersecting i.e. they do not see much change in the yield during these two days. The
yield roughly was 5.551% and 7.413% respectively.
 The gap between the two curves is very less for the almost the entire portion of the curve.

Maturity 11 11-June-09 12-June-09

Difference

(12th June–11th
June)
0.019178 4.062501 4.6384598 0.575959
1.764376 5.551292 5.5516468 0.000355
9.032838 7.413485 7.4127458 -0.00074
20.00265 7.877985 8.2239742 0.34599

Analysis 10
• Continuing my previous decision, I would have lost by selling short term bond on 11th June. Also, I
experienced a notional gain on long term bonds that I bought on 29th May due to decrease in yield.

• At the higher maturities since the gap between the curves has broadened, and the yields have
increased over previous day, thus the market price on 12th June is lower than 11th June. Thus if a long
term investor bought a bond on 11th June, he would suffer a notional loss as the yields have

9 43
increased. This is true even for a short term investor.
( Note – Underlying assumption here is that the coupon yield of the bond is higher that the YTM.)

• For a long term investor it is better to buy bonds on 12th June as the yields have increased in
comparison to the previous day.

Decision

• Short term investor: As short term investor I would have bought bonds today (in anticipation of
current trend – increased YTM & reduced prices) & sold later when prices increased.
• Long term investor: As long term investor I would have bought the bonds today (in anticipation of
current trend).But since the gap is not too great even for higher maturities, buying should be on a
cautious note.

Prediction

My previous prediction of short term yield hasn’t withstood as the yield has increased
I still predict the short term yield to decrease over coming time period looking at the previous trends.

12 44
Description

 The graph is upward sloping; The yield increases from 4.083% to 8.143% for a maturity period of
0.019 years to 20 years on 18th June and 4.907% to 8.1875% on 19th June for the same maturity.
 The curves are fairly close to each other .
 The gap between the two curves is very less for bonds with maturity greater than 3 years.

Maturity 18-June-09 19-June-09

Difference

(19th June–18th
June)
0.019178 4.083064 4.9079367 0.824872
20.00265 8.143504 8.1875123 0.044008

Analysis

• Continuing my previous decision, I would have lost by selling short term bond on 19th June. Also, I
experienced a notional gain on long term bonds that I bought on 29 th May and 12th June due to decrease
in yield.

• At the higher maturities since the gap between the curves is only marginal and the yields have
increased over previous day, thus the market price on 19th June is lower than 18th June. Thus if a long
term investor bought a bond on 18th June, he would suffer a notional loss as the yields have increased
but the loss would have been low. Same is for a short term investor
( Note – Underlying assumption here is that the coupon yield of the bond is higher that the YTM.)

• For a long term investor it is better to neither buy nor sell on 19th June as the market still doesn’t
seem to be conducive enough to determine the long-term perspective of the market.

Decision

• Short term investor: As short term investor I would have bought bonds today (in anticipation of
current trend – increased YTM & reduced prices) & sold later when prices increased.
• Long term investor: As long term investor I would have neither bought nor sold today (in
anticipation of current trend – reduced YTM).

Prediction

My previous prediction of short term yield has withstood as the yield has increased from 4.6 to 4.8.
I still predict the short term yield to decrease over coming time period looking at the previous trends.

45
Description 12
 The graph is upward sloping; The yield increases from 5.4108% to 8.139% for a maturity period of
0.019 years to 20 years on 26th June and 5.259% to 8.8229% on 25th June for the same maturity.
 It can be seen that bonds with maturity of 9.128 years are intersecting i.e. they do not see much
change in the yield during these two days. The yield roughly was 7.16%.
 The gap between the two curves goes on increasing for higher maturitie with the gap in yields
being 0.68377% for 20 years.

Maturity 11 25-June-09 26-June-09

Difference

(26th June–25th
June)
0.019178 5.410876 5.2590233 -0.15185
9.128728 7.163644 7.1639986 0.000354
20.00265 8.139201 8.8229716 0.68377

10 46
Analysis

• Continuing my previous decision, I would have gained by selling short term bond on 19th Feb.

• At the higher maturities since the gap between the curves has broadened, and the yields have
increased over previous day (evident from the table above), thus the market price on 29th May is lower
than 28st May. Thus if a long term investor bought a bond on 28th May, he would suffer a notional
loss as the yields have increased. This is true even for a short term investor.
( Note – Underlying assumption here is that the coupon yield of the bond is higher that the YTM.)

• For a long term investor it is better to buy on 26th June as the yields have increased.

Decision

• Short term investor: As short term investor I would have sold shorter maturity bonds or bought
higher maturity bonds today (in anticipation of current trend) since the gap is greater for higher
maturity bonds.

• Long term investor: As long term investor I would have bought higher maturity bonds today (in
anticipation of current trend) since the gap is greater for higher maturity bonds.

Prediction

My previous prediction of short term yield hasn’t withstood as the yield has increased
I still predict the short term yield to decrease over coming time period looking at the previous trends.

47
 BIBLIOGRAPHY

 www.nse.com (Archives for the Graphs)

 Wickipedia for theory on yield curves

 Investopedia

48
49
50