Hi guys! I have a doubt on page 192 of the Vol 6 (Reading 35), second bullet: “62 bps were lost by taking a long duration position during a period when yields increased (benchmark returns were negative in each duration bucket)”
I understand the concept: an increase in the yield curve resulted in negative returns on the benchmark, but can I also assume de other way round? If the benchmark returns are positive, it means that the yield curve has decreased?
Many thanks!
Stefano
Not necessarily.
The benchmark return will comprise the coupon yield and the price yield. Presumably, the coupon yield is positive (and should be given in any exam question). So it’s possible for the price yield to be negative (i.e., the YTM increases) and still have a positive (total) benchmark return. For example, the coupon return might be +6% while the price return is −4%; the total return is +2% while yields increased.
Got it!
For all of those who are interested in why this question arose, it came from one of the questions on a Level III morning session mock exam that I wrote. After my reply here, Stefano e-mailed me to point out that I had made an assumption on that question that wasn’t necessarily true. Because of Stefano’s question here and his follow-up e-mail, I posted an erratum on that question, and rewrote the vignette to eliminate the need for any assumptions.
Thanks, Stefano!
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