Email of the day on yield to worst versus total return calculations
Comment of the Day

December 14 2020

Commentary by Eoin Treacy

Email of the day on yield to worst versus total return calculations

Dear Eoin. First of all, thank you for all the great work you do! In a recent email there was a quote that mentioned 10-year Treasuries would decline by 2/3 in value if rates go from 1% to 3%. This is not even close to the correct math. A $1000 bond today selling at a 1% semi-annual yield would be worth $828.31 should rates go to 3%. It is true that a 1% bond has greater convexity than a 4% bond but the differences are not nearly as material as the quote suggests. A 4% par bond moving to 6% would trade at $851.23 which is less than a 3% difference to the fall in value for the 1% bond. Hope this helps, (I disclose that I am an actuary :))

Eoin Treacy's view

Thank you for this email which highlights an important consideration for bond investors. Your raw bond calculations gel with the bond calculators in Bloomberg I used to discuss the issue in the Big Picture Long-Term video.

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