CFA Level 1: Volatility of Yield Spreads

Yield-to-Maturity on Corporate Bond in CFA Exam

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Yield on Corporate Bond

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$r_{b} = i_{r,f} + E(\Pi) + m + l + s$

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Yield Spread (Relative to Default-Free Bond)

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$r = l + s$

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Factors that impact the level and volatility of yield spreads:

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Note that the spreads for higher-quality bonds are less volatile and change less as a result of the above-mentioned factors.

If we want to quantify the impact of the change in a spread on the bond price, we can use the following formulas:

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Price Impact (Due to Small Spread Changes)

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$PI \approx -ModD\times \Delta s$

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Price Impact (Due to Large Spread Changes)

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$PI \approx -(ModD\times \Delta s) + 0.5\times C\times (\Delta s)^{2}$

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Yield-to-maturity on a corporate bond depends on government benchmark yield and spread over the benchmark.
Factors that impact the level and volatility of yield spreads are: credit cycle, broader economic conditions, financial market performance, broker-dealers' willingness to provide liquidity in the market, and bond market supply and demand.