Question 22.
Based on Exhibit 1, for investors that purchased 10-year U.S. notes, the spread widening in basis points that will wipe out the additional yield gained for a quarter is closest to:
A. 6.03 in Singapore
B. 8.09 in Japan
C. 13.48 in the UK
Answer:
B is correct. The spread widening equals the additional yield income per quarter (4.62 - 1.67) / 4 = 0.7375% for Japan, divided by the higher of the two countries' durations, that is, 73.75 / 9.12 = 8.09
My questions:
1. When the question asked "spread widening in bps that will wipe out the additional yield gained for a quarter", what are they referring to? I thought any amount of increase in I/R would mean they are making a loss regardless of the level of rate? e.g. if they purchased a bank note at 4.62% yield and if the yield went up by 0.1% they would already be making a loss since rate up price down?
2. if the investors purchased a 10-year US notes, wouldn't the "additional yield gained" refer to 4.62% why did they take the difference of Japan's notes (1.67%) ?
3. Why did the answer divide 73.75 by the higher of the two durations?