TEA.15.4

Description

The term-to-maturity of a plaintiff’s investment plays an important role in its capacity to replace future losses in the amounts and at the times those losses are anticipated to occur.  Typically, yield curves are upward sloping so that extending maturity results in higher interest rates.  However, the reach for yield is not costless.  Extending maturity increases the degree of lock-in and the standard deviation in the total rate of return.  The optimum maturity is one where the marginal benefit of higher interest rates gained from extending maturity equals the marginal cost associated with greater lock-in and standard deviations in the total rate of return.  The evidence presented in this paper argues for short to medium term maturities in the range of 3 months to 5 years, given the uncertainty over what future interest rates and inflation will be.