BB10 for reading 14 has upward sloping

CFA Level III Fixed Income
#1

This is similar to my previous question related to BB3 from reading 13. For BB10, we are given static, upward sloping curve. To find rolldown return, they use:

  1. Initial price using YTM of 2.75%.
  2. Price in 6-months using YTM of YTM of 2.75%.

If static, upward sloping our YTM when calculating price in 6-months should use a YTM that is lower then 2.75%. It’s not a flat static YTM curve. where we should use 2.75% for both prices. The information for the static yield curve are not given for the different times though.

What am I missing? I get stuck on problems and waste hours and I know I should move on but i don’t like nagging doubts. Thanks.

#2

You’re not missing anything; it’s a lousy example.

The price in 6 months should use the (current) 9½-year YTM, which, of course, they didn’t give you. They make it appear that to compute the rolldown return, you keep the yield unchanged (which is incorrect), rather than keeping the yield curve unchanged.

This example has vexed many candidates, and will continue to do so until they fix it. It’s not just you.

#3

Thank you so much. I’m older and this is taking a lot of energy. This institute should hire a quality control person since their role is to administer professional exams. Thank you again.

#4

My pleasure.