extraCompensationForHigherRisk {bondAnalyst}

Calculates desired extra compensation (in terms of bps) for a risky Bond as compared Annual Percentage Rate(APR) of a comparable Bond.

Description

Calculates desired extra compensation (in terms of bps) for a risky Bond as compared Annual Percentage Rate(APR) of a comparable Bond.

Usage

extraCompensationForHigherRisk(APRofRiskyBond, APRofComparableBond)

Arguments

APRofRiskyBond

A number.

APRofComparableBond

A number.

Details

The additional compensation for the greater risk in Bond B is 20.9 bps (0.10839 – 0.10630 = 0.00209) when the yields are stated on a semi-annual bond basis. The additional compensation is 20.4 bps (0.10696 – 0.10492 = 0.00204) when both are annualized for quarterly compounding (Adams & Smith, 2019). In light of the information given, extraCompensationForHigherRisk() desired extra compensation for a risky Bond as compared Annual Percentage Rate (APR) of a comparable Bond for values passed to its two arguments. Here, APRofRiskyBond is given Annual Percentage Rate of risky bond, and APRofComparableBond is given Annual Percentage Rate of comparable Bond. The output of 20.9 means 20.9 bps.

Value

Input values to two arguments APRofRiskyBond and APRofComparableBond.

Author(s)

MaheshP Kumar, [e-mail]

References

Adams,J.F. & Smith,D.J.(2019). Introduction to fixed-income valuation. In CFA Program Curriculum 2020 Level I Volumes 1-6. (Vol. 5, pp. 107-151). Wiley Professional Development (P&T). ISBN 9781119593577, https://bookshelf.vitalsource.com/books/9781119593577

Examples

extraCompensationForHigherRisk(APRofRiskyBond=0.10839,APRofComparableBond=0.10630)