Fixed Income II
Reading 46. Understanding Fixed-Income Risk and Return
Learning Outcome Statements
l. explain how changes in credit spread and liquidity affect yield-to-maturity of a bond and how duration and convexity can be used to estimate the price effect of the changes.
CFA Curriculum, 2020, Volume 5
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Subject 8. Credit and Liquidity Risk
The yield-to-maturity on a corporate bond has two components:
- Government benchmark yield. A change in the yield can come from a change in either of these two components:
- Expected inflation rate.
- Expected real rate of interest.
- A spread over government benchmark. A change in the spread can come from a change in either of these two components:
- Credit risk of the issuer. This involves the probability of default and degree of recovery if default occurs.
- Liquidity of the bond. This refers to the transaction costs associated with selling a bond.
Regardless of the source of the yield-to-maturity change, the bond price change caused by a change in the yield-to-maturity will be the same.
In practice, there is often interaction between changes in benchmark yields and in the spread over the benchmark.
User Contributed Comments 8You need to log in first to add your comment.
I think breaking the LOS into segments this way makes debt instruments much easier to study
Flight to quality means that investors would be more interseted in low-return low-risk investments in times of turbulence.
This chapter here in analyst notes is explained in good way
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Im getting way to tired....all I read was stripping to spreading and something rocks....
time to hit the club...
im with you gill
now this makes sense !
gill that was the best comment i've read so far