Rolling down the curve

Buying a bond with a maturity beyond the investment horizon and selling it at the horizon. If an upward-sloping curve stays put, the bond ages into a lower yield, adding a price gain to its coupon income.

Where you will meet it

Rolling down the curve appears in 7 learning outcomes on the CFA syllabus. A few of them:

• Explain the rolling-down-the-yield-curve strategy
  CFA Level II · Fixed Income

  “Rolling down the curve means buying a bond with a maturity longer than the investment horizon and selling it at the horizon.”

• Explain what drives the return on a bond portfolio when benchmark yields change
  CFA Level III · Portfolio Management Pathway

  “Return also includes rolling yield (carry, before any financing cost): the coupon income plus rolldown as a bond ages along an upward-sloping curve.”

• Set out the methods for estimating expected returns on fixed income
  CFA Level III · Asset Allocation

  “The discounted cash flow approach uses today's yield to maturity; for a horizon equal to Macaulay duration, yield changes roughly offset between price and reinvestment, so yield is a fair estimate, adjusted for expected rolldown and any expected yield change.”

• Break down and interpret a model that decomposes the return on a bond portfolio
  CFA Level III · Portfolio Construction

  “Expected return is built from components: yield income (coupon ÷ price), plus rolldown return from the bond ageing along a sloped curve (together, the rolling yield), plus the expected price change from yield moves, −D × Δy + ½ × C × (Δy)², minus expected credit losses, plus or minus currency gains or losses.”

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with R · Glossary