- CFA Exams
- 2023 Level I
- Topic 6. Fixed Income
- Learning Module 46. Understanding Fixed-Income Risk and Return
- Subject 8. Credit and Liquidity Risk
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Subject 8. Credit and Liquidity Risk PDF Download
A change in yield-to-maturity will cause a change in bond price. What is the source of the change in the yield-to-maturity?
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.
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