Capital market expectation - factors affecting yield.

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sachin_patel

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Q. 15. Other than changes in the rate of inflation, specify two factors that impact the yields available on inflation-indexed bonds.
my answer : two factors that affect the inflation indexed bonds yield are
  1. Credit risk of the issuer
  2. Maturity of the bond.
CFAI answer:
  1. Two factors that affect the yields available on inflation-indexed bonds (IIBs) are as follows:
    • Overall economic growth and its corresponding impact on real interest rates bear a direct impact on IIB yields. A growing economy places upward pressure on all bond yields. Though the impact may be muted due to the nature of the IIB structure, IIBs are not immune to interest rate risk.
    • Investor demand for bonds in general and for IIBs in particular has an inverse impact on IIB yields. As with non-IIBs, rising investor demand serves to drive interest rates lower and the lack of investor demand drives up the yields that issuers must pay in order to sell the bonds they need to issue.
 
I do understand the answers given by CFAI.
If this was exam question,
would I get any points? how muhc?
 
the factors you have specified are for all bonds in general.
 
but those do affect yields of inflation indexed bonds as well..so is my answer incorrect in context of the question?
or let’s say from exam perspective?
 
Sachin - I understand your point and agree. However to keep things simple this LOS is meant to understand impact of economic information (CME) in forecasting asset class returns. Besides IIB, it deals with cash (CP), corporate bonds, equity returns, if it gives better perpective.
Hope that helps.
 
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