Breakeven spread analysis advantage, somebody, getting, change, please

brain_wash_your

Hi all,
Can somebody explain this to me please? I am not getting why the yield advantage is put in as change in price?
Many thanks
Solar

zwjy

Hi
Please refer to example on page 138 of curriculum. Japanese investor is earning 75bp additional income by investing in French bonds. However, if spread widens during a quarter (e.g. French interest rates rise while Japanese interest rates remain at same level), price of French bond will fall - resulting in price loss for the investor.

If spread rises (e.g. french interest rate rises) by 10.71 bp then french bond price will fall by 75bp due to duration of 7. This price loss fully offsets the additional income on the bond.

Take care,