Fixed income decompose

CFA Level III
#1

It can be decomposed into 5 factors. Income yeild, roll down return, expected price change, credit loss, currency G/L.

The responding period for income yield is coupon distribution period, for example, 6 month.

The period for roll down return is bond’s maturity for example 3 years. Is this right??

If this is right, I don’t think the period BTW the 2 components don’t correspond each other.

Am I correct? or please correct me if I’m wrong.

#2

The relevant period here is the Investment Horizon/Holding Period.

If you buy a 5-year semiannual-pay bond and the invesment horizon is 1 year, then the:

  • CURRENT YIELD = annualized coupon/current price
  • ROLLDOWN RETURN = (price at end of 1 year - current price)/current price

Current yield assumes no reinvestment income.

Rolldown return assumes no change in yield curve during the investment horizon.