Dear Sir
As per Riding the yield curve theory, if future spot rates do not evolve as per as current implied forward rates and it turns out to be lower, then we can buy longer maturity to earn more than R(n) but option C here states that it does evolve hence it is like Pure Exp theory so how come bonds with maturity greather than our investment horizon can generate higher return.
Option B says that spot curve are expected to be higher than fwd which means today when you’re buying the bond fwd rates are used to disc the value & yk int ka rel^n with price so today when the rates are lower price is higher, in future when you go to sell the bonds at that time spot rate will be used which is again higher so price would be low.
Scenario 2 talks about PET where we know buy & hold strategy is best as you can’t earn more than rf.
Scenario 1 is talking about riding the yield curve theory but the last word ‘overpriced’ is wrong, it would be underpriced.
It seems that they’ve mingled PET with riding the yield curve theory.
Have they given any explanation as to why option C is correct?
Scenario 3 is wrong; it should be otherwise actually. For the riding the yield strategy the expected future spot rate should not actually evolve as per the forward rate. Please ignore this scenario.