Can anyone explain this using a timeline please ?
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I remember it was explained by Sanjay Sir very comprehensively in class, taking numbers. The underlying assumption is that the future interest rates will evolve as per the observable forward rates.
So, if the current forward curve ( one year forward rate, one year from now) from f(1,1) to f(4,1) is from f(1,1) = 2%, f(2,1) = 4%, f(3,1) = 6% and f(4,1) = 8%. You may draw the upward sloping forward curve.
The expectation is that the spot rates (from r(1) to r(5)) will evolve exactly as per the forward rates. Here, active management has no role to play, because, whatever, you may do, ( buy short term and invest in your horizon period, or buy a longer maturity bond than your maturity and square it off at your horizon), what you’ll get is your horizon spot rate only. So, it’s simply better to hold the bond till your horizon.