spreads

maratikus Wrote:
-------------------------------------------------------
> Wayne1106 Wrote:
> --------------------------------------------------
> -----
> > I am going over the alternative investment
> section
> > in schweser and I came across a sentence where
> it
> > seems to be a bit odd to me. I was wondering if
> > someone might be able to help me out with this.
>
> > Book 4 Page 102 it says "A fund might go long a
> > corporate bond and short a Treasury bond,
> thereby
> > earning the difference in yields. However,
> these
> > funds can suffer large losses if the yield on
> the
> > risky bond rises while the yield on the
> Treasury
> > falls."
> >
> > I might just be a little confused but I don't
> see
> > why the second sentence corresponds with the
> > first.
>
> Let's say both corporate bond and treasury have
> face value of $100 and zero coupon. You buy
> corporate bond at $60 and sell treasuries at $90
> hoping that you will earn the yield spread.
> However, if the treasuries yields fall (e.g.
> treasuries go up to $95 just due to that, not
> time) and corporate yields go up (e.g. corporate
> bond goes down to $40), you will be losing $5+$20
> = $25. does that help?

I understand your example but then aren't you somewhat saying that yield = interest rate ? sorry fixed income has always been my weak point and I get confused a lot.

I guess my confusion here is why would treasuries price go up when its "yield" falls (since yield is % of return from the investment)