Yield change to offset yield advantage

[johntavv]

This is Schweser reading 22, concept checker 16.
Nominal Yield Australian Bond = 7.65%
Duration Australian bond = 6.5
Nominal Yield New Zealand Bond = 6.85%
Duration New Zealand Bond = 5.3
We need to find the required change to offset the current yield advantage?
So Yield advantage to Australian bond = 7.65 - 6.85 = 0.8%. Since holding period is 6 months this is 0.4% or 40bps.
Change in yield for Australian bond = -0.4% / -6.5
= 0.06%
So yield would need to increase by 6bp.
Since the Australian bond has a higher yield (and so a lower price), why don’t we want the Australian bond to Decrease in yield in order to offset the yield advantage?

 

[cpk123]

you want higher yield bond. (it is better for your portfolio). You know the bond is cheaper as well. So the question being asked is, you buy the cheaper bond because it has a yield advantage. How much of a yield change over 6 months will cause your yield advantage to disappear?
– ans yield increase 6 bps over 6 months - it will wipe out your 40bps advantage if you held the Aus Bond.

 

[S666]

If you hold the Australian bond and the yield rises, the price drops and it’s the price drop which will wipe out the difference in yields…