This is Schweser reading 22, concept checker 16. Nominal Yield Australian Bond = 7.65% Duration Australian bond = 6.5 Nominal Yield New Zealand Bond = 6.85% Duration New Zealand Bond = 5.3 We need to find the required change to offset the current yield advantage? So Yield advantage to Australian bond = 7.65 - 6.85 = 0.8%. Since holding period is 6 months this is 0.4% or 40bps. Change in yield for Australian bond = -0.4% / -6.5 = 0.06% So yield would need to increase by 6bp. Since the Australian bond has a higher yield (and so a lower price), why don’t we want the Australian bond to Decrease in yield in order to offset the yield advantage?
you want higher yield bond. (it is better for your portfolio). You know the bond is cheaper as well. So the question being asked is, you buy the cheaper bond because it has a yield advantage. How much of a yield change over 6 months will cause your yield advantage to disappear?
– ans yield increase 6 bps over 6 months - it will wipe out your 40bps advantage if you held the Aus Bond.
If you hold the Australian bond and the yield rises, the price drops and it’s the price drop which will wipe out the difference in yields…
Hi guys I’m stuck on this one too and get caught up with the word " yield" .
Reading again is it correct to say that the question is actually by how much does the interest rate on the Australian market need to change so that both bonds are equal?
What I find confusing is that it asks how to offset “the current yield advantage of the Australian bond”
And reply is that yield on the Australian needs to increase
When they specify the yield on the bond - 7.65% for Australian bond, and 6.85% for the other - they are being stated without reference to the other factor (viz. Duration) which is different between the two bonds.
Now you are then being asked to state how much should the yield on the HIGHER yield bond change - so that the duration adjusted yields are the same…
(Not sure if I am stating this correctly - but you should get the idea from this).
In another qbank question they refer to
Quote "Dicken says that an increase in market yield of the U.S. bond can also make up for the yield differential "
What is
Market yield of the bond? ?
the 7.65% and 6.85% on the previous problem were market yields.