Someone please factcheck me on this…
5 components of total return over given time period for fixed income are:
- Coupon return defined as (coupon / current price)
- Rolldown return defined as (end price - beg price / beg price) assuming no change in yield
- Change in yield - using duration and convexity formulas
- Change in spread - using duration and convexity formulas
- Any Foreign currency return the port has exposure to
Side question, but really my main question, the % change in price due to yield change (using duration and convexity formula)… is that assuming an immediate change in yield? What if yield changes slowly over time? i.e. If asked for 1 year total return, and yields are expected to change 1% slowly over the year vs an immediate 1% change at start of year, is the total return different? Or more extreme, yields are expected to change 1% at the end of the year vs. changing 1% at start at year… any difference?