i am holding a bond with a coupon 7.95% issued on 21-Nov-2021 and maturing on 21-Nov-2026 and having Mduration = 3.8. What will be impact on annualized return, if central bank cuts the rate of interest by 25 bps
Is it a government bond, or a corporate bond?
It is a corporate bond with annual interest payment feature. Coupon payment dates are 21-Nov of every year.
Viz.
21-11-2022. 7.95
21-11-2023. 7.95
21-11-2024. 7.95
21-11-2025. 7.95
21-11-2026. 107.95. ( Maturity)
If it were a government bond, then its yield should change by the amount of the central bank’s rate change (assuming that it’s an across-the-board cut), so the price impact will be roughly -Dur_{mod}\times\Delta y
If it’s a corporate bond, then its yield change will likely be less than the benchmark (government) rate change; spreads tend to move opposite benchmark rate changes. The problem is that we don’t know what that spread change will be.
Where did you get this question?
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Thks S2000magician…for prompt reply…i have clarification…since the mduration of the bond is 3.8 and if there is a cut by central bank by 25 bps than the impact will be 3.8X25bps( assume move parallel to sovereign bond) = 0.95…thus mean there will percentage price movement is around 0.95 percent…how this move account in annualized return…
Day before the 25bps cut ytm was 7.95 ( price 99.93/ 100) after cut ytm moves to 7.70 ( 100.902/100) the difference in price movement after the cut is 0.9723…
Pls guide me how to reflect the jump in price after 25bps cut into annualized return…
Will i have do 7.70% + .95% =
Or what else to reflect …
Appreciate your help
Regards,
Ni2
The annual return increases by 95 bps.
thnks