Question

If an investor needs to place funds in the money market for a term of 3 months, would you advise him/her to ride the curve? explain using expectation of rates in the coming months

Answer 1

Riding the yield curve is a strategy where an investor buys a long-term horizon bond and then sell it before the maturity to gain from the decline in yield. Here the investor’s investment horizon is 3 months so if he wants to ride the yield curve then he should look for buying a security that matures in 6 months or a year and then sell it in 3 months. Here the most important thing is that the yield should decline so that the bond price will rise and you can sell the bond at high interest rate. The expectation of the interest rate is important, if the investor expect the interest rate to decline then he should choose this option. This is slightly a risky option because whatever security he is buying there should be enough liquidity so that he also able to sell the bond without any extra cost. It would be justifiable for the investor to take this with the expectation of falling yield and low liquidity risk in the fund which he is buying.