I understand a bond’s return consists of coupon and price return. But how should we think of total return in term of yield or credit spread? For instance, is the following expression the correct way to think about this? Note that this is just an illustration, mathematically it might not be exact. Thanks.
TR = coupon + price return = coupon + inverse of yield = coupon + inverse of (risk free + credit spread)
If you talk about yield, that’s typically the YTM of a bond including the credit spread. It’s an IRR exercise given the cash flows and price. It’s not the actual return you will earn on a bond investment, because among other issues with YTM, it assumes intermediate cash flows are reinvested at YTM which is unlikely given changing interest rates / slope of the yield curve.
It’s handy to get some quick info on the potential return of a bond, but ultimately the total return would be coupon + roll + change in rates - credit losses +/- currency effects.
yeah…and liquidity premium and maturity premium and so on…bonds are complex instruments.