may do a better job of avoiding reinvestment risk.
18. Assuming the following yields:
Week 1: 3.84% Week 2: 3.51% Week 3: 3.95%
Answer the below questions.
(a) Compute the absolute yield change and percentage yield change from week 1 to week 2.
The absolute yield change (or absolute rate change) is measured in basis points and is the absolute value of the difference between the two yields as given by
absolute yield change = │initial yield – new yield│ X 100.
Inserting in our yields where Week 1’s yield is the initial yield and Week 2’s yield is the new yield, we get:
absolute yield change = │3.84% – 3.51%│X 100 = 33 basis points.
The percentage change is computed as the natural logarithm of the ratio of the change in yield as shown by
percentage change yield = 100 X ln (new yield / initial yield).
Inserting in our yields where Week 1’s yield is the initial yield and Week 2’s yield is the new yield, we get:
percentage change yield = 100 X ln (3.51% / 3.84%) = ?8.99%.
(b) Compute the absolute yield change and percentage yield change from week 2 to week 3.
The absolute yield change (or absolute rate change) is measured in basis points and is the absolute value of the difference between the two yields as given by
absolute yield change = │initial yield – new yield│ X 100.
Inserting in our yields where Week 2’s yield is the initial yield and Week 3’s yield is the new yield, we get:
absolute yield change = │3.51% – 3.95%│ X 100 = 44 basis points.
We see that there has been a greater change in basis point compared to (a).
The percentage change is computed as the natural logarithm of the ratio of the change in yield as
shown by
percentage change yield = 100 X ln (new yield / initial yield).
Inserting in our yields where Week 2’s yield is the initial yield and Week 3’s yield is the new yield, we get:
percentage change yield = 100 X ln (3.95% / 3.51%) = 11.81%.
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