Page 26 - FINAL CFA SLIDES DECEMBER 2018 DAY 15

Session Unit 16:
54. Understanding Fixed Income Risk and Return (B/A)

Example: Price effect of spread changes: Consider a bond that is valued at $180,000 that has a duration of 8 and
a convexity of 22. The bond’s spread to the benchmark curve increases by 25 basis points due to a credit
downgrade. What is the approximate change in the bond’s market value?

tanties

1.The largest component of returns for a 7-year zero-coupon bond yielding 8% and held to maturity is:
A. capital gains.
B. interest income.
C. reinvestment income.

2An investor buys a 10-year bond with a 6.5% annual coupon and a YTM of 6%. Before the first coupon payment is made, the YTM for the bond
decreases to 5.5%. Assuming coupon payments are reinvested at the YTM, the investor’s return when the bond is held to maturity is:
A. less than 6.0%.
B. equal to 6.0%.
C. greater than 6.0%.