I'm hoping that you may help me understand how the pull to par of a premium bond impacts the carry and roll calculations over a year.
I understand that carry = Coupon income - cost of funds and that the forward price = Spot-carry
If a 5y bond paying a 5% coupon was priced at 110 to yield 3% with a cost of funds of 2.5%, I would say that the carry of the position is 5 - 110*0.025 = 225bp. This tells me that the 1y forward price must be 107.75. A lot of traders will take 225/5 = 25bp and say that there is 25bp of spread cushion over the year before the trade breaks even. I can see doing that on a par bond but am not sure that it applies on a premium bond.
Now, the pull to par on this 5y bond is going to be roughly 2 points a year (coup-ytm). Does this mean that out of the 2.25% carry, 2% is from rolling to par and 25bp is true carry?