Hi guys, Do you know why it is said in the CFAI Book4 page 138 third paragraph before the end of page, when doing Breakeven Spread Analysis, that we must use the higher of the 2 countries’ DURATIONS ? We want to decrease the higher yield bond advantage (=>decrease its price). In others words, we are focused on an increase in the yield (interest rate) in the higher yield bond’s country => we should use the higher YIELD bond duration, no ? The question 22 relates also to this point. Thanks in advance, Bern
If we use the greatest duration we get the lowest increase in yield required to offset the yield advantage. BUT this yield advantage is offest only if the change in yield occures in the highest duration country. In my opinion, if we used the lowest duration, we may find a yield change that may offset the yield advantage whatever the country in which the yield change. What’s your opinion ?
Wait, so bottom line is to use the highest duration measure between the two bonds? They are so vague on this and it also doesnt help that the ONE example they give only lists the duration of the Japanese bond.
i am confused too - i thought it was highest duration of the two countries and I just answered a Stalla question on this and got it wrong, as they used the lower duration WTF
post the question breh
In the CFAI text, it states to use the highest duration between the two bonds.
Use the highest duration bond unless they structure the question in the context of a particular country movement - it would represent the minimum spread change that would equalize the return - but if they ask you about the basis point move in a particular market that would equalize the return you have to use the duration applicable to that market.
I agree with your answer JohnnyMac, it makes sens. I wanted to be sure that using the lowest duration was correct depending on the context. Thanks a lot !
clear as mud
JohnyMac Wrote: ------------------------------------------------------- > Use the highest duration bond unless they > structure the question in the context of a > particular country movement - it would represent > the minimum spread change that would equalize the > return - but if they ask you about the basis point > move in a particular market that would equalize > the return you have to use the duration applicable > to that market. guarantee something like this will be on the exam and all the jabronis will go with highest duration
Thanks JohnyMac - now I see the error that I committed. The Stalla question asks for the change in a specific country interest rate that is required to eliminate the yield advantage. When answering the question I just went with the higher duration (which was the wrong country, of course), so I got it wrong. Many thanks for clearing this up. And remember, RTFQ!!!