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In order to understand the results, assume the following:
Investment Horizon: 10 Years Current Yield: 2.0% Money Market Yield: 0.25%
Upon entering these figures, the chart calculates the actual return (highlighted in RED) that is achieved as determined by:
To illustrate, let's assume a waiting period of 30 months before investing in anticipation of rising rates. After that time, rates in fact do rise 50 basis points to 2.50%.
Even though bond yielding 2.50% is available in this scenario, the money market yield earned during the waiting period lowers the average annual return to only 1.94%, 6 basis points lower than the 2.0% that could have been earned by simply buying a 10-year investment today.
The break even yield chart calculates the yield that must be achieved in the future simply to break even with what is locked-in today. Using the same example, if you waited 30 months before investing a yield of 2.59% would be needed to break even with the 2.0% that could have been earned today. The sooner an investment is made, the sooner investment goals will be met in this scenario.
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