Bond YTM
You have a bond due in two years with a 10% coupon trading at 90. (i) What is the YTM? (ii) We move forward one year and the bond is still trading at 90. What has happened to the YTM and why? (iii) How do you derive a market-based proxy for changes in default risk?
Hi Kyle.arm1985, hope I can help. Do any of these links cover what you're looking for:
More suggestions...
You're welcome.
Work in LevFin and happy to take a stab. Any public credit guys feel free to chime in.
1.) Principal repayment at par => 100-90=10, however since you only get it in 2 years the amount attributed to the YTM approximation is 10/2=5; Coupon of 10 (10% of par value). Thus approximation of YTM is (10+5)/90= c. 16.7%. In reality YTM will be slightly less than this approximation as this doesn't include time value of money/compounding effects.
2.) If price still 90ct 1yr in, the YTM at that point in time will be greater as you are standing to make that "pull-to-par" in a shorter timeframe. Intuitively though this is probably the market derating the credit/believing that the credit profile has worsened/has more refi risk, otherwise in a perfect world the price should rise given you are closer to maturity and should converge to par (assuming no/minimal refi risk).
3.) A spread based measure like a Z spread is your friend. Problem with bond price is it could be affected by base rate movements (i.e. duration). Alternatively if available the underlying CDS would give you a view.
Soluta consectetur atque illo sed. Vitae in error minima sed. Sed autem aliquid corrupti consectetur laboriosam nihil officiis. Optio deserunt at harum et. Quo expedita repellendus harum dolor delectus.
Error atque amet nemo eius vel perferendis consequatur est. Tenetur totam saepe sit quia consectetur sit tempora. Aut aperiam incidunt voluptatem mollitia ducimus. Vero et praesentium quia molestias vel repellat.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...