Fixed Income

aroranidhi2004
Finance Junkie
Posts: 41
Joined: Thu Oct 16, 2014 4:51 pm

Fixed Income

Postby aroranidhi2004 » Wed Nov 05, 2014 3:20 am

A disadvantage of G-spreads and I-spreads is that they are theoretically correct only if the spot yield curve is:

A) upward sloping.

B) downward sloping.

C) flat.

why G-spreads and I-spreads are accurate only when spot yield curve is flat.

Which of the following is most likely to be the money duration of newly issued 360-day eurocommercial paper?


A) 360 days.

B) 4.3%.

C) 25 million.



Please help with this.

Regards,
Nidhi

edupristine
Finance Junkie
Posts: 722
Joined: Wed Apr 09, 2014 6:28 am

Fixed Income

Postby edupristine » Thu Nov 06, 2014 12:27 pm

A disadvantage of G-spreads and I-spreads is that they are theoretically correct only if the spot yield curve is flat and approximately the same across maturities. However the spot yield curve is normally upward sloping.

aroranidhi2004
Finance Junkie
Posts: 41
Joined: Thu Oct 16, 2014 4:51 pm

Postby aroranidhi2004 » Thu Nov 06, 2014 2:53 pm

Thanks for reply.but my question was, why it is happening? why these spreads are accurate for flat spot yield curves only and pls help with qns below as well:

Which of the following is most likely to be the money duration of newly issued 360-day eurocommercial paper?


A) 360 days.

B) 4.3%.

C) 25 million.

edupristine
Finance Junkie
Posts: 722
Joined: Wed Apr 09, 2014 6:28 am

Fixed Income

Postby edupristine » Fri Nov 07, 2014 3:40 am

First you need to understand what is meant by a flat spot yield curve.

A yield curve in which there is little difference between short-term and long-term rates for bonds of the same credit quality. For example, a flat yield curve on U.S. Treasury would be one in which the yield on a two-year bond is 5% and the yield on a 30-year bond is 5.1%.

Practically, the spot yield curve is upward sloping which sounds logical too. The investors should be compensated for holding long maturity instruments in terms of higher yields.

G-spread is the spread over the exact interpolated point on the Treasury curve.

For example, if I have a corporate bond maturing June 15, 2018 and it is yielding 3%, and it is quoted over the 5-year Treasury yielding 1% and maturing on May 31, 2017, then the corporate bond has a T-spread of 200bps. However, assuming the Treasury curve is upward sloping, it will have a lower G-spread because the point on the government curve corresponding to June 15, 2018, will be greater than 1% (because of higher maturity--> yield will be higher than 1%).

aroranidhi2004
Finance Junkie
Posts: 41
Joined: Thu Oct 16, 2014 4:51 pm

Postby aroranidhi2004 » Fri Nov 07, 2014 4:21 am

Thanks a lot. Got it.


Return to “CFA Level I”



Disclaimer

Global Association of Risk Professionals, Inc. (GARP®) does not endorse, promote, review or warrant the accuracy of the products or services offered by EduPristine for FRM® related information, nor does it endorse any pass rates claimed by the provider. Further, GARP® is not responsible for any fees or costs paid by the user to EduPristine nor is GARP® responsible for any fees or costs of any person or entity providing any services to EduPristine Study Program. FRM®, GARP® and Global Association of Risk Professionals®, are trademarks owned by the Global Association of Risk Professionals, Inc

CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by EduPristine. CFA Institute, CFA®, Claritas® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

Utmost care has been taken to ensure that there is no copyright violation or infringement in any of our content. Still, in case you feel that there is any copyright violation of any kind please send a mail to abuse@edupristine.com and we will rectify it.