 # Joe Bookman Question / Excess Spread on HY Bonds (CFAI Practice)

Hi

I can’t work out why I am wrong about the answer to the below question from CFAI practice q’s:

It’s certain to be something stupid I’m missing but my answers were:

X. (0.68% x 3/12) - (2.4 x -0.3) - (55% x 0.7% x 3/12) = 0.89%
Y. (1.74% x 3/12) - (1.4 x -0.3) - (60% x 4.3% x 3/12) = 0.85%
Z. (2.63% x 3/12) - (1.1 x -0.3) - (65% x 13.8% x 3/12) = 0.97%

Therefore choose answer C (Bond Z). But the answer was A (Bond X).

Can anyone help?

Your workings are right but I suggest you be careful with the last term where there are two percentages.

X.
(0.68% x 3/12) - (2.4 x -0.3) - (55% x 0.7% x 3/12)
= 0.17% + 0.72% - 0.09625%
= 0.79375%

Y.
(1.74% x 3/12) - (1.4 x -0.3) - (60% x 4.3% x 3/12)
= 0.435% + 0.42% - 0.645%
= 0.21%

Z.
(2.63% x 3/12) - (1.1 x -0.3) - (65% x 13.8% x 3/12)
= 0.6575% + 0.33% - 2.2425%
= -1.255%

So, choose Bond X as it has the highest positive excess return

Yeah just remember to use your decimal points properly the these Q’s and you’ll be solid

Cool thanks both. For anyone else making the same error, I think it’s easier for me to wrap my head around keeping everything in decimals rather than having “loss given default” or “probability of default” a number greater than 1.

So would probably work this in future as:
X. (0.0068 x 3/12) - (2.4 x -0.003) - (0.55 x 0.007 x 3/12) = 0.0079375 (or 0.79%)
Y. (0.0174 x 3/12) - (1.4 x -0.003) - (0.60 x 0.043 x 3/12) = 0.0021 (or 0.21%)
Z. (0.0263 x 3/12) - (1.1 x -0.003) - (0.65 x 0.138 x 3/12) = -0.01255 (or -1.26%)