Unexpected Returns on Bonds. The Case of the Pandemic Period in Poland
13 Pages Posted: 11 Oct 2020
Date Written: October 7, 2020
Abstract
Changes in the term structure of interest rates unknown a priori to investors induce unanticipated rates of return on all financial instruments, especially on bonds and bond portfolios. Unexpected returns on bond investments arise particularly often in economic downturns. During the COVID-19 pandemic period in Poland interest rates have been substantially reduced by Central Bank. Within three months, the WIBOR 1Y rate fell from 1.84% (February 27, 2020) to 0.3% (June 4, 2020). The consequences of the Central Bank decision have been crucial for investors. A one-time increase (decrease) in rates decreases (increases) the market value of assets. The literature offers some mathematical tools to investigate this problem. The aim of this study is to assess and analyse the influence of a considerable decline in spot rates on unexpected profits on Treasury bonds to support investors decisions and emphasize practical aspects of bond risk measurement. It is important to note that after the quite long time period of almost flat interest rate structure in Poland, the topic regarding bond risk caused by changes in interest rates has become significant again.
Keywords: decision support, changes in interest rates, risk, bond, duration, convexity
JEL Classification: E43, E47, G11, G12
Suggested Citation: Suggested Citation