percent price change ≈ −modified duration × yield change
Consider a bond whose modified duration is 11.54 with a
yield of 10%.
If the yield increases instantaneously from 10% to
10.1%, the approximate percentage price change will be:
−11.54 × 0.001 = −0.01154 = −1.154%.
First, please note that in a standardized credit default swap, you do not pay (in your example) 750 bps every year for protection. The 750 is just a "market standard quote" (MSQ), but you pay every year a standard "running spread" (usually 100 bps; for high-yield credit it might be 500 bps) (with 4 payments a year on standardized dates: March, June, ...
This is not a duration neutral trade then if you're assuming equal proceeds in on each leg. In that case, why do you need to know how much to allocate to each bond? If you short $100 million on one leg, then you use that to buy the long leg
It's difficult to repo more than 3 months. Essentially a bank would be locking up their balance sheet over this time period which is difficult in this post crisis regulatory environment. So traders use OIS which is relatively more liquid to lock in financing by paying fixed on term OIS for example. That's why repo trades at a positive spread to OIS, while ...
During the recession, when rates fell towards zero, we're talking about Treasury yields. The yield of a high yield bond is comprised of the Treasury yield and credit spread so even though Treasury yields fell, the credit spread widened much more which is whe prices fell sharply.
If the market convention is yield to worst, then it would be the lowest yield an investor could receive (e.g. yield to call). Could mean yield to maturity, but the point is that it's different based on the market practice for that specific asset. It's basically a catch-all field for quoted yields on Bloomberg
Under the Rendleman-Bartter model, a closed-form formula exists for the zero-coupon bond price. However, it is very complex involving Bessel functions and complex numbers...
Deriving the formula is actually the purpose of a paper by Uri Dothan called "On the term structure of interest rates" that you can find here: https://www.sciencedirect.com/science/...
Yes I think you can say that the total return for a bond over a period equals to first order the sum of
B) change in yield over the period * dv01 of the bond.
The question is, what assumption to make about the change in yield. The term roll down pnl is usually defined to mean that the yield curve remains constant over the period. For example, ...
I think you have the hedge wrong way around. You want to pay fixed /rec ois to the delivery date. Then your p/l will be (implied repo -fixed rate on ois swap) + (daily ois rate -daily repo rate).
The idea is that the first term is a fixed positive number (say 20bp) and the second term you hope stays around -5bp through the life of the trade.
Yes, it someone does. The return of a bond is equal to initial OAS + mark-to-market OAS + rolldown + fallen angel cost.
Your use of spread duration can quite proxy for rolldown. If you are working with US, you can neglect the fallen angel cost.