I just read this somewhere, and I’m not able to understand the reasoning behind it. Could someone help please ? Thanks.
If you hold a bond, and the interest rate goes up and down and all over the place… But you hold it to maturity and collect your $1000, what happen to the YTM of the bond? Did you still get $1000?
That answer will be the similar to your question.
That helps. Thanks.
Thanks @125mph would you mind elaborate further, I read the same in the curriculum too and fail to comprehend fully (in 2021 book p260 for other’s reference).
It says if you hold a bond to maturity then credit spread change is zero. credit spread may vary over time. Say at year 1 it is 100bps; year 2 is 50bps. Assuming two guys bought at Y1 and Y2 (the assumed different credit spread). Base on the statement above, credit spread change is zero for both of them if they decided to hold to maturity - the maths won’t work, as as a matter of fact the credit spread only either move by 50bps or 100bps, so it won’t be zero credit spread change for both of them, I think I grabbed the wrong end of the stick.
I would add that it is not saying credit spread is zero if hold to maturity, but change in credit spread is zero. so if I buy a bond at 100bps spread, it will automatically converge back to 100bps at maturity?