Breakeven Spread Analysis advantage, countries, decrease, why

joehogue

Hi guys,

Do you know why it is said in the CFAI Book4 page 138 third paragraph before the end of page, when doing Breakeven Spread Analysis, that we must use the higher of the 2 countries' DURATIONS ?
We want to decrease the higher yield bond advantage (=>decrease its price). In others words, we are focused on an increase in the yield (interest rate) in the higher yield bond's country => we should use the higher YIELD bond duration, no ?

The question 22 relates also to this point.



Thanks in advance,

Bern

Valores

If we use the greatest duration we get the lowest increase in yield required to offset the yield advantage. BUT this yield advantage is offest only if the change in yield occures in the highest duration country.

In my opinion, if we used the lowest duration, we may find a yield change that may offset the yield advantage whatever the country in which the yield change.

What's your opinion ?

bpdulog

post the question breh

bboo

Use the highest duration bond unless they structure the question in the context of a particular country movement - it would represent the minimum spread change that would equalize the return - but if they ask you about the basis point move in a particular market that would equalize the return you have to use the duration applicable to that market.