Spread Duration of Non-Treasury Bonds

[PJStyles]

Is the spread duration of a Non-Treasury Bond always the same as its effective duration? P.53 of Schweser Volume 1 - Practice Exam Question 14.4. They answer it with the assumption and statement that for all non-treasury bonds, the effective duration and spread duration is the same number.

 

[AnalyseThis]

The spread duration is zero for treasury bonds. Treasuries are the benchmarks against which spreads are measured. Hence they have no spread duration.

 

[PJStyles]

I get that part… I’m referring to the spread duration of non-treasury bonds.

 

[AnalyseThis]

Sorry… my brain is tired

 

[jamespucyk]

In many senses spread duration is like normal duration. Simply if interest rates rise or fall a small amount Duration is roughly correct. Similarly if spreads move in or out a small amount, then the discount rate moves down or up.

 

[bigwilly]

For the purposes of this test, Yes you can assume that Spread Duration = Effective Duration for Non-treasuries. In the real world this doesnt necessarily hold as we heatly debated this a month or so ago

 

[volkovv]

yep, its in CFAI errata
in real world, this may not hold true because of the optionality present in some non-treeasuries, but for the test purposes assume they are equal

 

[comp_sci_kid]

volkovv i think even for the purpose of the test if it is callable bonds we cant assume that

 

[bigwilly]

^CSK I would love to agree with you, but for some reason I thought that the text assumes otherwise…did they finally fix it?

 

[comp_sci_kid]

ummm it would be CRAZY to assume such a thing, it is UN-POSSIBLE!

 

[volkovv]

^ I agree
here is what CFAI says after the issued their errata
“For portfolio of non-Treasury securities, spread duration equals portfolio duration. However, because the spread duration of Treasury securities is zero, a portfolio that includes both Treasury and no-Treasury securities will have a spread duration that is different from the portfolio duration”
So in a case when portfolio has only non-Treasuries, they are either assuming that these non-Treasuries are not callable or that is even in presence of callable non-Treasuries that statement will hold (which would be wrong)
So, as I said for the test I am taking it as gospel. But I agree with you, bigwilly and others, that in reallity when you have optionality that staement doesn’t hold.