300 Hours mock exam Question #29

same…….i could not get the answer 2.1% either.

I am guessing….

Coupon yield   = 2.56%

%change in bond price = 0.18%

Credit spread change   = -0.47%

YTM  change   = -0.99%

Forex  = 0.78%

total = 2.06%

I definitely want to defer to another for a correct answer.

Hey @jerrylow, @jewelswizz, thanks for spotting this error, it seems that we have missed out Q29’s explanation in depth in the email. You seem right @jerrylow

Here’s the explanation and workings, hope this helps!

Total expected return = Rolling yield ± E(Change in price based on investor’s benchmark yield view) ± E(Change in price due to investor’s view of credit spread) ± E(Change in price due to investor’s view of currency gains or losses)

Rolling yield = Coupon income + Rolldown return

Coupon income = Annual coupon payment/Current bond price

= $2.50/$97.50

= 2.564%

Rolldown return = (Bond price_t=1 – Bond price _t=0) / Bond price _t=0

= (97.68 – 97.50)/97.50

=0.185%

Therefore, Rolling yield

= 2.564% +0.185%

= 2.749%

E(Change in price based on Steven’s benchmark yield view)

= [–MD × ΔYield] + [1/2 × Convexity × (Yield)²]

= [-4.72×0.0020] + [1/2 × 0.20 × 0.0020²]

= -0.94396%

E(Change in price due to Steven’s view of credit spread)

= (–MD × ∆Spread) + [½ × Convexity × (∆Spread)²]

= (-4.72×0.0010) + [1/2 × 0.20 × 0.0010²] = -0.47199%

E(currency gains or losses) = 0.78% (given)

Therefore, total expected return

= 2.749% -0.944% -0.472% + 0.78%

= 2.11%