{"id":17121,"date":"2021-07-07T16:09:48","date_gmt":"2021-07-07T16:09:48","guid":{"rendered":"https:\/\/analystprep.com\/study-notes\/?p=17121"},"modified":"2026-03-20T19:31:07","modified_gmt":"2026-03-20T19:31:07","slug":"describe-the-strategy-of-riding-the-yield-curve","status":"publish","type":"post","link":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/describe-the-strategy-of-riding-the-yield-curve\/","title":{"rendered":"Riding the Yield Curve"},"content":{"rendered":"<p><script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"Conditions for riding the yield curve strategy\",\n    \"text\": \"Riding the yield curve works best under certain conditions. Which of the following is least likely to be one of those conditions? The yield curve should:\\n\\nA. Be downward sloping.\\n\\nB. Be upward sloping.\\n\\nC. Remain unchanged.\",\n    \"answerCount\": 1,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"The correct answer is A.\\n\\nRiding the yield curve strategy works best when the yield curve is upward sloping and is expected to remain unchanged. A downward sloping yield curve does not support this strategy.\\n\\nB and C are correct conditions for successfully implementing the strategy.\"\n    }\n  }\n}\n<\/script><\/p>\n<p><script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"ImageObject\",\n  \"url\": \"https:\/\/analystprep.com\/study-notes\/wp-content\/uploads\/2021\/07\/Rolling-Down-the-Yield-Curve.jpg\",\n  \"caption\": \"Rolling Down the Yield Curve\",\n  \"width\": 1590,\n  \"height\": 1389,\n  \"copyrightNotice\": \"\u00a9 2024 AnalystPrep\",\n  \"acquireLicensePage\": \"https:\/\/analystprep.com\/license-info\",\n  \"creditText\": \"AnalystPrep Design Team\",\n  \"creator\": {\n    \"@type\": \"Organization\",\n    \"name\": \"AnalystPrep\"\n  }\n}\n<\/script><\/p>\n<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/ovQh3D6WBOw\" width=\"611\" height=\"343\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\n<p><em><strong>Riding the yield curve<\/strong><\/em> (rolling down the yield curve) is an active trading strategy where a bond trader buys bonds with a maturity longer than their investment horizon.<\/p>\n<p>In an upward sloping curve, bonds with longer maturities earn higher yields relative to shorter maturities. Therefore, a longer maturity bond is valued at a successively lower yield and, thus, a higher price as it approaches maturity. Therefore, buying a longer maturity bond will yield higher returns due to price gains, provided that it is held for a period less than maturity.<\/p>\n<p>If the upward sloping yield curve shape and level remain unchanged over the investment horizon, riding the yield curve will generate higher returns than a maturity matching strategy. The higher the difference between the forward rate and spot rate, the higher the total return.<\/p>\n<p>For example, an investor with a six-month investment horizon may buy a one-year bond because it has a higher yield; the investor sells the bond at the six-month date but profits from the higher one-year yield.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter size-full wp-image-26486\" src=\"https:\/\/analystprep.com\/study-notes\/wp-content\/uploads\/2021\/07\/Rolling-Down-the-Yield-Curve.jpg\" alt=\"Rolling Down the Yield Curve\" width=\"1590\" height=\"1389\" srcset=\"https:\/\/analystprep.com\/study-notes\/wp-content\/uploads\/2021\/07\/Rolling-Down-the-Yield-Curve.jpg 1590w, https:\/\/analystprep.com\/study-notes\/wp-content\/uploads\/2021\/07\/Rolling-Down-the-Yield-Curve-300x262.jpg 300w, https:\/\/analystprep.com\/study-notes\/wp-content\/uploads\/2021\/07\/Rolling-Down-the-Yield-Curve-1024x895.jpg 1024w, https:\/\/analystprep.com\/study-notes\/wp-content\/uploads\/2021\/07\/Rolling-Down-the-Yield-Curve-768x671.jpg 768w, https:\/\/analystprep.com\/study-notes\/wp-content\/uploads\/2021\/07\/Rolling-Down-the-Yield-Curve-1536x1342.jpg 1536w, https:\/\/analystprep.com\/study-notes\/wp-content\/uploads\/2021\/07\/Rolling-Down-the-Yield-Curve-400x349.jpg 400w\" sizes=\"auto, (max-width: 1590px) 100vw, 1590px\" \/>Nonetheless, riding the yield curve is always risky because there can be no guarantees that the yield curve will remain unchanged over time. Additionally, riding the yield curve will not be as profitable as the buy and hold strategy when the interest rates rise.<\/p>\n<blockquote>\n<h2>Question<\/h2>\n<p>Riding the yield curve works best under certain conditions. Which of the following is <em>least likely<\/em> to be one of the conditions? The yield curve should:<\/p>\n<ol type=\"A\">\n<li>Be downward sloping.<\/li>\n<li>Be upward sloping.<\/li>\n<li>Remain unchanged.<\/li>\n<\/ol>\n<h4>Solution<\/h4>\n<p><strong>The correct answer is A.<\/strong><\/p>\n<p>Riding the yield curve works for upward sloping yield curves and assumes that the yield curve will remain unchanged.<\/p>\n<\/blockquote>\n<p>Reading 28: The Term Structure and Interest Rate Dynamics<\/p>\n<p><em>LOS 28 (d) Describe the strategy of riding the yield curve.<\/em><\/p>\n\n            <div \n                class=\"elfsight-widget-pricing-table elfsight-widget\" \n                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In an upward sloping curve, bonds with longer maturities earn higher yields&#8230;<\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[102,472],"tags":[216,548,547,554],"class_list":["post-17121","post","type-post","status-publish","format-standard","hentry","category-cfa-level-2","category-fixed-income","tag-cfa-level-2","tag-fixed-income","tag-reading-32","tag-riding-the-yield-curve","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.4 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Riding the Yield Curve Strategy in Bonds<\/title>\n<meta name=\"description\" content=\"Learn how riding the yield curve works, including roll-down returns and how bond traders profit from changes in yield curves over time.\" \/>\n<meta name=\"robots\" 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