Excess return

CFA Level III Fixed Income
#1

With excess return it states that its what the bond investor receives for assuming credit risk. Then they have the equation which is:

Excess return≈ s×t - _(SD×_∆s)

From this we can see that as spread narrow (delta s is negative) that the excess return increases. I don’t understand why this would be the case. If spreads narrow, high yield bonds behave more like investment grade bonds. My thinking here is, then during a spread narrowing excess return would NOT increase (return we receive from assuming credit risk) because the two are behaving identically. But the equation states otherwise.

Thanks,

1 Like
#2

any update on this? I have the same confusion.

#3

When the spread narrows, the YTM decreases.

When the YTM decreases, the price of the bond . . . does something.

#4

ohh right! Thanks a lot.

#5

My pleasure.