Corporate Bond Returns: Yield, Accrued Interest, and Price Risk
Summary
The document explains why a corporate bond’s quoted yield is not the cash payment an investor automatically earns over a short holding period. Yield to maturity is a comparison measure based on the bond’s price and promised cash flows, with assumptions about holding to maturity and reinvesting coupons. If an investor sells earlier, the realized return also depends on the sale price, accrued interest, coupons received, transaction costs, and funding. Bond liquidity can make selling less straightforward than selling shares.
It identifies government-rate movements and corporate credit-spread changes as key influences on bond prices: higher rates or wider spreads generally lower prices. One answer frames a foreign-currency bond’s short-term P&L as including bid-ask costs, price movement, accrued interest and coupons, currency conversion, and funding. Another uses default losses to illustrate that credit risk can be uneven over time. The discussion is educational rather than a forecast: it gives no expected monthly rate movement, and examples or index references do not establish future returns.
Key ideas
- A bond’s yield to maturity is not necessarily the return earned over a short holding period.
- Selling price, accrued interest, coupons, funding, and transaction costs affect realized P&L.
- Higher government rates or wider credit spreads generally reduce corporate bond prices.
- Corporate bond liquidity varies, so an investor may not be able to sell easily at a desired price.
- Default losses can cluster, making average credit-loss estimates an incomplete description of risk.
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Full text
# corporate bonds - general questions
# corporate bonds - general questions
Newbie here and not trading IRL but for a school assignment. I want to buy corporate bonds because they are a safe bet from what I read. I have a few questions though, I hope I will find an answer here: Can I sell them after one month? If yes, will I still get the bond yield/12? And finally, how much the interest rates fluctuate in a month? Thank you!
## Answer by D Stanley (score 1)
https://quant.stackexchange.com/a/60461
> Can I sell them after one month?
Probably - it depends on what type of bond and how liquid (easy to sell) it is.
> If yes, will I still get the bond yield/12?
Maybe - but more than likely you'll sell it for more or less than what you paid for it. You do get whatever interest accrues between the time you bought the bond and the time you sell it.
The two main factors that affect the price of a bond are underlying ("federal government") interest rates and the credit spread for a non-government bond. If interest rates go up, the price of a bond goes down (since the fixed coupon rate you get is less attractive now). If the credit spread goes up, the price of a corporate bond also goes down, because there is a higher risk that the issuer will default and you won't get your money back.
> And finally, how much the interest rates fluctuate in a month?
It varies as well. Look at the history of treasury rates over time to see what kind of movements you can expect.
## Answer by demully (score 1)
https://quant.stackexchange.com/a/60470
Interesting choice, for a school project. If you want to get an idea for how much these things usually don't but sometimes can and do move around, have a look at LQD or HYG/JNK, these being respectively the "investment grade" (ie duller) and "high yield" (ie riskier) universes.
The "yield" you're seeing is what you would get as an equivalent compounding bank rate if you held the bond until expiry, and reinvested the coupons (at that rate). You don't explicitly receive it. It exists as a consistent way of measuring and comparing investments with potentially very different cashflows.
Actually buying your credit, you would receive the coupons and then 100 at expiry. You can sell it (but selling corporate bonds is not as easy as selling most corporate stock). The question is at what price? The yield is a function of price, and is usually thought of as a combination of a government bond (of the same tenor) plus a "credit spread" (that gives you a cheaper price and higher return than lending to government for the same period of time). People have spent whole careers trying to work out how, why, and when those move!
But it's worth one quick thought. Suppose that say 1% of corporate bonds fail to pay every year on average (and credit investors typically get around a quarter or a third of their money back when this happens - google "recovery rates"). Then suppose that half of these defaults happen in the one year in ten you get a recession. So the timing of losses is 0.5%, 0.5%, 0.5%, 5%, 0.5%... to give you your average 1%. You're essentially receiving an insurance premium here; and every now and then, a hurricane comes along and smashes you up a bit.
For the magnitude of the risks, easiest just look at the share prices of LQD, HYG and/or JNK.
## Answer by Dimitri Vulis (score 0)
https://quant.stackexchange.com/a/60458
Suppose, your home currency is USD, and you fancy a EUR-denominated corporate bond quoted 99-99.5. This is bid-offer clean price.
You pay USD spot rate0 * (clean offer price0 + accrued0) * notional.
You should assume that you borrow this money and pay interest on it.
There's a risk that the bond issuer will default. If that doesn't happen, then in 1 month you sell the bond and receive
USD spot rate1 * (clean bid price1 + accrued1) * notional.
and stop paying for funding.
You P&L comes from:
bid-ask spread
change in bond price from time0 to time1 (mostly explainable by the change in riskless interest rate and in credit)
coupons and change in accrued from time0 to time1
funding cost.
## Answer by user42108 (score 0)
https://quant.stackexchange.com/a/60463
"how much the interest rates fluctuate in a month?"
If you mean the yields (i.e. Treasury rate + credit spread) or just Treasury rates then you can download some corporate bond index data here: https://fred.stlouisfed.org/searchresults/?st=OAS.Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.