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Corporate bond yield change : answer makes no sense

Dear Analysts,

Here we go: Schwezer notes V.3 , Hedging interest rate risk of corporate bond by shorting government bond

Two government bond: 1) 5- year  ; yield 1,9% ; Effective D. 4,7 ; Price 99,96
                                       2) 7 year ; yield 2,2%  ; Effective D. 6,5 ; Price 99,56

One corporate bond: 3) 7 year ; yield 3,77% ; Effective D. 6,1 ; Price 101,5.

1) Calculate initial benchmark (G Spread) of corpo bond.
   Answer: you find , by basing computation on duration, that you need to short 22,2% of government bond 1 and (1 - 22,2%) of government bond 2. Makes sense.
Benchmark yield becomes 1,64% (corpo yield - weight bond 1 x yield bond 1 - weight bond 2 x yield bond 2)

2) Estimate new price of CORPORATE BOND  when yield of GOVERNMENT BOND 1, 5 years increases by 10 bp and yield of  GOVERNMENT BOND 2, 7 years increases by 15 bp, while yield of CORPORATE BOND declines 3 bp

A.
You have to use the weights computed in 1 : so 22,2% *  10 bp + (1-22,2%) * 15 bp = 13,9 bp  change in the “hedge portfolio” composed of the shorted government bonds

B.
Then, Shwezers use this in the computation applied to government bond yield change to compute the Corporate bond yield change: 13,9 bp - 3 bp = net change of 10,9 bp for Corporate bond yield.

They then apply - Duration * net change = - 6,1 * 0,00109  = -0,0066 = - 0,66% 
Why on earth do they do that?

If we  see the thing from the angle of the total portfolio with the short position in Gov Bond and the long position in Corpo Bond , then the net change would be [MINUS 13,9bp] - 3bp = - 16,9 bp right ?

I guess the questions is so badly asked in the book it makes the all easy stuff complicated.

Could someone help me on this? Thanks ! 

Ps: it is p. 367 v.3 CFA III

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Holly ****, don’t say me it is because Corpo Yield decrease by 3 BP vis à vis BENCHMARKED CORPO BONDs (the mix of corpo bonds computed in 1) to have the same duration as the Corpo Bond) ?!

If yes, it makes total sense, but ****, the question is so badly asked in this case.. Incredibly misleading. *****.

Doing the CFA is like investing wisely on the Stock Exchange: pay when subscription fees are low, be disciplined & stick to your plan, start in advance with a long term strategy & avoid just short term bets. Then: Success is Coming

First, it’s Schweser.  Please try to get the spelling correct.

AlexTe wrote:
… don’t say me it is because Corpo Yield decrease by 3 BP vis à vis BENCHMARKED CORPO BONDs (the mix of corpo bonds computed in 1) to have the same duration as the Corpo Bond) ?!

OK, I won’t.

(But that’s the reason.)

Simplify the complicated side; don't complify the simplicated side.

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I was also struggling with this particular example in Schweser and must say it is very badly worded.

This is sadly, to my option at least, true for much of the fixed income chapters in Schweser