Swanson wishes to decrease portfolio exposure to the transportation sector and has identified as sale candidates the three non-callable fixed-rate bonds shown in Exhibit 2.
Exhibit 2
Comparative Analysis of Transportation Sector Bonds
Bond X Y Z
Effective duration 12.4 9.1 10.1
Benchmark spread 125 125 125
Swanson makes the following notes:
- The three transportation sector bonds
- have the same spread as the on-the-run 10-year US Treasury,
- are priced near par value, and
- have roughly equivalent underlying credit risk.
- The yield curve is currently upward sloping.
For valuation reasons, Swanson plans to sell the bond with the lowest G-spread.
Determine which bond Swanson should sell. Justify your response.
Answer is Bond X
Determine which bond Swanson should sell. (Circle one.)Bond X
Bond YBond ZJustify your response.While the precise G-spreads for bonds X, Y, and Z cannot be readily determined without knowing the yields of other government bonds along the yield curve, it is stated that the yield curve is upward sloping. Based on this fact, the interpolated yield for weighted average durations less than 10 must be less than the yield for the on-the-run 10-year US Treasury, and the interpolated yield for weighted average durations more than 10 must be more than the yield for the on-the-run 10-year US Treasury. Since all three bonds have equivalent benchmark spreads, Bond X will have the lowest G-spread, because the difference between the interpolated yield and bond yield will be lowest for Bond X.
Given that Bond X has the lowest G-spread among the bonds, which have equivalent credit risk from Swanson’s perspective, she will sell Bond X because it is overpriced compared with Bond Y and Bond Z.
能解释一下答案吗？ 看不懂。。。。
