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The price of a defaultable bond is driven by 3 things:
the observable interest rates
the probability of default
the price of the bond after a default (or, equivalently, the loss given default)
The price of an investment-grade bond reacts mostly to interest rates. Further into junk, the interest rates affect the price less, and the thoughs of what might ...
3
The premise of your question is wrong. European bond markets usually quote clean prices (without the accrued) for performing bonds - exactly like U.S., Canadian, and most Latin American bond markets.
Both in American and in European bond markets, bonds begin to be quoted dirty (with the accrued, total proceeds) only when they are on the verge of defaulting.
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1
You can decompose swap returns this way although I would argue that you should think more in terms of risk factors. For most any fixed income instrument (and especially for swaps), we often break exposure into three types of yield curve movements which explain the most variation, aka the Litterman and Scheinkmman (1991) factors:
Changes in level (equivalent ...
1
What makes a particular fit good?
Naturally for quantitative finance (and really for any quantitative science), while we can sometimes assess the performance of something by eye, this is not a reliable metric. Typically assessing something by eye is only acceptable when throwing away bad/awful fits. You should not use such qualitative methods for assessing ...
1
Assume there is no interest rate, you loan me 1 dollar and then I give you 0.5 dollar half year and then 1 year later.
The duration of my payment is 0.75 years and maturity is 1 year.
Duration is the average of the time I made the payment and maturity is when I made my last payment.
We can easily proof that maturity is larger or equal to duration, and ...
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