2016 AM Fixed income Question 2b - Spread widening analysis

CFA Level III Fixed Income
#1

2016 AM question 2b: We are supposed to calculate the minimum change in yield that would eliminate Tauravia’s quarterly yield advantage vs Scorponia. The quarterly yield advantage vs Scorponia is 80 bps. The duration of Tauravia is 8, however the country beta is 0,5 for an investor based in Scorponia. In spread widening analysis we are supposed to use the higher of the two bonds’ duration. Scorponia’s duration is 7,5 and Tauravia is 8, however the country premium for Tauravia for an investor based in Scorponia is 0,5. Hence I calculated the duration of Tauravia as 4 and based my calculation on 80/7,5. Could anybody explain why we do not need to take the country beta into account here? The solution is to use 80/8.

Btw, am I right that there is no search function on this forum?

#2

Formula for break even spread analysis is:

ΔS = (yield advantage / frequency) / Duration of higher bond.

You must not adjust duration for foreign β.

#3

But the duration for the locally based investor is 4 is it not?

#4

You should just calculate BE spread to take decision whether is acceptable to purchase a foreign bond or not. Thus, you don’t adjust duration for beta of foreign bond. You should simply learn and apply formula. It is easy.

#5

Then sit back in your spare time and pity the sweaty candidates scratching their heads, pencil trimmings all over their desks.

#6

It’s my bounded rationality mode. Just won’t to waste time trying to understand everything (what is impossible given the time constraint, in my opinion). I want to help to my fellow candidates sharing such approach. :slight_smile:

#7

where can we find 2016 mock exam? it is not in CFA official mock exam

#8

Am I right that there is no search function on this forum?

#9

There is, upper right. The picture of magnifier.

#10

IS there a similar example in the book?Feel hard to relate to the material.

#11

As per this, 2) is not covered by the curriculum anymore.

Anyways, good luck on exam day!

#12

Thank you so much!! You are a life saver. I meant it.

So really all the mocks before 2018 are not quite relevant? what do you use for the mock?

#13

Thank you so much!! You are a life saver. I meant it.

So really all the mocks before 2018 are not quite relevant? what do you use for the mock?

#14

indeed, not relevant for current exam