Breakeven spread analysis advantage, additional, gap, providing

Valores

in vol.4, P.149 Q8, - spread between US and German bonds is 300bps, providing German investors who purchase a US bond with an additional yield income of 75 bps per quarter.  Duration of German bond is 8.3.  If German interest rates should decline, how much of a decline is required to wipe out the yield advantage?
US yield is higher than German yield, shouldn’t German yield (interest rate) increase to close the gap between the two bonds?

LiquidAssets10

75bps gain on german bond is from the price increase due to decrease in yield?

Dapper425

I’m unsure of what you are asking in your last post?
Does the inverse relationship between interest rates and bond prices come as a shock to you?

segalm

US bond yield is 300bps higher than German bond…
so if German bond declines  by 9*4 = 36 bps per year…
then the spread between them would be 336bps???
so the spread between the two becomes bigger.. so how does it breakeven?

bdavi77962

You seem to be over thinking this.
Let’s say the US bond is yielding 10% pa ( or 2.5% for the next 3 mths) and the German bond is yielding 7% pa  (or 1.75% for the next 3 mths). Now if you had bought the German bond you would be 75 bps down on the other option (the US bond). If interest rates on (only) the German bond were then to drop by 0.09% then, as we know that the duration is 8.3 (or an 8.3% change in bond price for a 1% change in yield) we know that the German bond will earn 8.3 x 0.09% = 0.75% in capital gain from the fall in interest rates of 0.09% on this bond and the total return will be 1.75% (yield) plus 0.75% (capital gain) for a total return of 2.50% and the same (breakeven) return as the US bond.
Make sense now?

jmh530

your explaination should be in the curriculum… thx =D
what if i dont have the german bond in hand?