Question

A five-year 2.4% defaultable coupon bond is selling to yield 3% (Annual Percent Rate and semi-annual compounding). The bond pays interest semi-annually. The risk-free yield is 2.4%. Therefore, its current credit spread is 3% -2.4% = 0.6%. Two years later its credit spread increases from 0.6% to 1% while the risk-free yield doesn’t change. Assuming the face value of the coupon bond and risk-free bond is 100. The Return in yield in two year = 2.473% (annual) Value of bond after two years = 97.193 c)Decompose the return into two components attributable to moving to maturity and the increase in the credit spread.

Answer 1

So return attributable to the change in Maturity is = 2.96% and return due to change in Maturity is = 2.47%-2.93%= -0.46%