Listen to a Business English Dialogue About Roll down
Claire: Hi Bruce, have you ever heard of the term “roll down” in finance?
Bruce: Yes, Claire, I have. “Roll down” refers to a strategy used in bond investing where investors sell bonds with longer maturities and buy bonds with shorter maturities as time passes.
Claire: That’s correct. Can you explain how the “roll down” strategy works in practice?
Bruce: Sure, Claire. As bonds approach their maturity dates, their prices tend to converge towards their par values, so investors can capitalize on this by selling the higher-priced longer-term bonds and reinvesting the proceeds into lower-priced shorter-term bonds.
Claire: I see. What are some benefits of using the “roll down” strategy?
Bruce: One benefit is that the “roll down” strategy can help investors capture capital gains from the price appreciation of bonds as they move closer to maturity, while also potentially reducing interest rate risk by holding shorter-duration bonds.
Claire: That makes sense. Are there any risks associated with the “roll down” strategy?
Bruce: Yes, there are risks such as changes in interest rates, credit risk, and liquidity risk, which can impact the performance of the bond portfolio and the effectiveness of the “roll down” strategy.
Claire: I understand. How do investors determine which bonds to include in their “roll down” strategy?
Bruce: Investors typically consider factors such as the yield curve, credit quality, and liquidity of the bonds, as well as their individual investment objectives and risk tolerance when selecting bonds for their “roll down” strategy.
Claire: Thanks for explaining, Bruce. The “roll down” strategy seems like a useful tool for bond investors to optimize their portfolios over time.
Bruce: Absolutely, Claire. It’s a strategy that allows investors to potentially enhance returns and manage risk in their fixed-income investments.