A London-based investor wants to estimate roll-down return attributable to a fixed-rate, option-free corporate bond versus UK

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A London-based investor wants to estimate roll-down return attributable to a fixed-rate, option-free corporate bond versus UK gilts over the next six months assuming a static, upward-sloping government yield curve and a constant credit spread. The corporate bond has exactly 10 years remaining to maturity, a semiannual coupon of 3.25%, and a YTM of 2.75%, while the closest maturity UK gilt is a 1.75% coupon currently yielding 1.80%, with 9.5 years remaining to maturity.

Describe how the relative roll-down return would change if the investor were to use an interpolated government benchmark rather than the actual 9.5-year gilt.

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Fixed Income Analysis

ISBN: 9781119850540

5th Edition

Authors: Barbara S. Petitt

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