Hello, I have two questions about “yield spread” on Fixed Income part of CFA
(1) As we know, changes in the real risk-free interest rate, the expected inflation rate, a maturity premium will affect all bond prices and yields (including US T-bill, note and bonds). Thus my conclusion is that changes in these three above-mentioned factors will NOT have any impact on the yield spread. Is my statement correct…?
(2) We use the "after-tax yield” and “taxable-equivalent yield” to make the yields on corp bonds and tax-free bonds such as treasuries comparable. However, for the compare yield spread measures such as the absolute yield spread, the relative yield spread and the yield ratio, it seems that these three measures’ calculation didn’t take the tax factors into consideration. Is my impression correct…? If so, why didn’t we take the tax impact into consideration for these yield spread measures? If not, shall we convert tax-free bond into taxable bond (or vice verse) before we calculate the absolute/relative yield spread?
Sorry to ask so many concept questions… Your help is greatly appreciated!
If you are comparing taxable and nontaxable bonds, it would make sense to convert the nontaxable yield to a taxable yield before computing any of the measures you mention.
However, you won’t have to worry about such subtleties on the exam.
No need to apologize; that’s why people come here.