Spread change wipes out yield income interest, question, because, numbers, problem

pawn

CFAI Bk 4 Reading 30 EOC pg 149 problem 8.

US and German bond spread of 300 bps.

Gives German investors a quarterly income of 75 bps.

German bonds duration is 8.3.

The problem asks what change in German interest rates will wipe out their income.

The answer , and I knew how to calculate this because there is a blue section with same numbers , is 75/8.3 = 9.04 bps

My question is why do they use quarterly yield and calculate a change in rates based on quarterly numbers to calculate a spread change

I'm sure my understanding is wrong , but something seems amiss to me

mik82

Thanks AMA , that is a practical suggestion, and I don't hear anybody saying I have the completely wrong idea about this question!

mcmc

As you said, something is never mentioned in the text.

bkballa

I know that duration measures sensitivity of price for a 100 bps change in interest rates , but always thought that the said interest rate was an annual one . Now 9 bps change for one quarter will wipe out 75 bp of yield but the 9bps is not an annual number . On the same basis , it would be annualized at about 36 bps . But they never mention this. Am I wrong to assume ( or even write down in the answer in the exam ) that it is 9.04 bps per quarter or 36.16 bps per annum change?

skycfa

My suggestion : Give them both (9.04 bps per quarter or 36.16 bps per annum change).

Windjammer

some time period needs to be specified, so for example 3 months.