Bond Question - what does it mean the bond is cheap?
I am reading some research report on Bond, thety are saying that a bond is cheap. Is it based on the bond yield ? spread over the treasury bond or the bond price ??
Thanks.
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Bond is NOT cheap. He's a playa!
Chances are the "cheap" comment is related to the spread over treasuries. Current spreads for investment grade credit are wide (cheap) relative to historical averages. The all in yield is very low though due to the low treasury rates (this would cause some to argue that bonds are expensive).
More info would be helpful, but generally speaking, the lower the grade, the higher the yield, and consequently the lower the price. Therefore, if a bond is down-graded the yield should increase and price should decrease due to the added risk.
That's not really what the question was.
When someone says a bond is cheap, they mean it's undervalued. If a bond is undervalued that means the yield is high relative to the risk and the price is too low (since a rise in price will decrease the yield).
The opposite of cheap is "rich," when a bond's yield is too low and its price is too high.
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