16. If we used bonds’ own yield changes in Eq. (37–7), these yield changes would include the roll-down yield change. In this case, we should not use the forward rate (which includes the impact of the rolldown yield change on the return, in addition to the yield income) as the first term on the right-hand side of Eq. (37–7). Instead, we would use the spot rate.

17. Individual investors also can use Eq. (37–8), but the interpretation is slightly different because most of them are so small that they cannot influence the market rates; thus they are “price takers.” Any individual investor can plug her subjective rate expectations into Eq. (37–8) and back out the expected return given these expectations and the market-determined forward rates. These expected returns may differ from the required returns that the market demands; this discrepancy may prompt the investor to trade on her view.

..................Content has been hidden....................

You can't read the all page of ebook, please click here login for view all page.
Reset
44.223.31.148