PC 7.2: Modeling Return

What does the rolldown return assume?

No change in yield curve

In layman’s terms, what are the 5 aspects of FI return?

1. Coupon payment

2. Rolldown return - price return assuming no change in yield (rolldown yield curve)

3. If there is a change in yield, use duration and convexity measures to find price impact

4. If there is a change in spreads, use duration and convexity measures to find price impact

5. FX

1. coupon return

2. Rolldown return

3. Rolling yield

4. Expected price change due to change in benchmark yield

5. Expected price change due to change in credit spreads

6. Expected g/l vs. investor’s currency

7. Overall projected return

1. 3 / 101.5 = 2.956%

2. (Proj. END / BEG price) - 1 = (102.419 / 101.5) - 1 = 0.905%

3. 2.956 + 0.905 = 3.861%

4. %change value = (-MD x CHNG y) + (1/2)(C)(CHNG y²) = (-5.6)(-0.0054) + (1/2)(28)(-0.0054²) = 3.065%

5. %change value = (-MD x CHNG s) + (1/2)(C)(CHNG s²) = (-5.6)(-0.0006) + (1/2)(28)(-0.0006²) = 0.337%

6. expected appreciation x % foreign = 3.925% x .4 = 1.570%

7. 2.956 + 0.905 + 3.065 + 0.337 + 1.570 = 8.833%

x

x