Fixed Income – CFA Level 2

This topic has 1 reply, 2 voices, and was last updated 20 hours ago by Madhu Chandarasekaran, CFA.

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July 28, 2025 at 11:27 am #9937

Santo Ashok
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Please explain the reasoning for the following question with regards to Local Expectations theory

Q. According to Local Expectations theory, what would the difference in one month total return if inv

Please explain the reasoning for the following question with regards to Local Expectations theory

Q. According to Local Expectations theory, what would the difference in one month total return if investor purchased a 5 year zero coupon bond versus a two year zero coupon bond?

A. The solution provided in the book is provided as follows

The Local Expectations theory asserts that total return over a one month horizon when investor purchases a 5 year zero coupon bond will be the same as 2 year zero coupon bond.

The concept mentioned the book is as follows

Although the local expectations theory is economically appealing, it is observed that short holding period returns on the long term bonds in fact exceed those on short term bonds

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August 1, 2025 at 2:10 pm #9942

Madhu Chandarasekaran, CFA
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Local Expectations Theory states that over a very short investment horizon, the expected return from long-term bonds will be approximately equal to the expected return from short-term bonds.

Local Expectations Theory states that over a very short investment horizon, the expected return from long-term bonds will be approximately equal to the expected return from short-term bonds.

Though this is not true in real world the local expectation theory states for a specific short term period the rate of return should roughly be the same for bonds of different maturities

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