Yield Duration Australian Bond 7.65% 6.5 New Zealand Bond 6.85% 5.3 Cal how much either of the yields need to change to offset the current yield advantage of Australian Bond. Answer: Australian Bond yield increse by 6BP, New Zealand yield decrease by 8BP. I am confused about the direction of the yield. How can increase in the yield of Australian bond offset the yield advantage of australian Bond?? Shouldn’t this be opposite?

Since the holding period is 6 months, the yield advantage of the Australian bond over the New Zealand bond is (7.65%-6.85%)/2 = 40bps With a duration of 6.5, the price change for the Australian bond will be 6.5 * changes in yield. Therefore the change in yield = 40bps / 6.5 = 6.15 bps. Since Australian bond is the one currently with the yield advantage, its yields will have to increase 6.15 bps to wipe out the 6-month yield advantge of 40 bps relative to the New Zealand bond. Vice versa, the disadvantaged New Zealand bond’s yield will have to decline 40bps/5.3 = 7.5bps to break even with the Australian bond.

Thanks ‘‘HappyKing02’’. Basically yield on bond with higher yield needs to increase further to setoff the current advantage. thanks again.

JUst one question if anyone can advise: How do you reconcile the fact that the yield advantage of investing in Australian bond may disapper if the Australian bond yields decline and NZ bond yields increase?

pmoonoi Wrote: ------------------------------------------------------- > JUst one question if anyone can advise: > How do you reconcile the fact that the yield > advantage of investing in Australian bond may > disapper if the Australian bond yields decline and > NZ bond yields increase? I think it should be the other way, i.e., yield advantage of investing in Australian bond may disapper if the Australian bond yields increase and NZ bond yields decrease.

agree with happyking’s logic.