CFA Volume 4 SS #9 Here’s the deal…I know the formula & I know how to compute it…but here’s what I am worried about. If CFA Multiple choice say ssomething like A) Increase Domestic Rate .25% B) Increase Foreign Rate .25% C) Decrease Domestic Rate .25% D) Increase Foreign Rate .25% …so this potential question is not about whether or not you can compute breakeven…its about knowing which directional interest rate change negates the yield advantage…I looked thru CFA text…and its not really addressed For example pg 38 says yield advantage may disappear if domestic yields increase and foreign yields decline… but then end of chapter question #8 says…(in a nutshell) if “domestic yields decline”…how much of a decline is required to wipeout yield advantage? could any1 add insight…as to how the combination of foregin/domestic int rt changes wipeout the yield advantage?
it will depend on the question asked, you can search my post on it from a few days ago but in general its either domestic rate decline or foreign rate increase will wipe your yield advantage when domestic yiled declines, it will benefit the domestic bonds (the ones you didn’t buy, if you chose higher yielding foreign bonds), since when interest goes down, domestic bond’s price is increasing (you can think of this case as missed opportunity of not investing in domestic bonds) when foreign yield increases, it directly affects the foreign bond that you bought, thus negating its yield advantage, since its price will go down after increase in rates
Think about it logically, yields going up mean prices going down, you don’t want a foreign bond’s yield to increase, that would imply a price decrease and would wipe out a yield advantage.