Question

Bond A is a 3 month bond, Bond B is a year old bond, and Bond C is a 30 year bond. With an upward sloping term structure, which bond will have the highest return?

Answer 1

When there is an upward sloping yield curve, it will mean that there is an expectation of better performance in the long run as they are reflecting that long term Bond yields are higher than the short term Bond yields, so it is a representation of the boom in the coming periods of the economy and the long term Bond yields will be providing higher rate of return, so those bonds who are having a higher duration will be providing the highest return.

So it can be said that Bond C which is 30 year Bond,will be providing the highest rate of return because it is a scenario of upward sloping yield curve in which there is an expectation of outperformance in the long run.