Relative Value in Government Bonds

This section discusses the factors that must be assessed in analyzing the relative values of government bonds. Since these securities involve no credit risk (unless they are emerging-market debt), credit spreads are not among the considerations. The zero-coupon yield curve provides the framework for all the analyses explored. 

The objective of much bond analysis is to determine the relative values of individual securities and thus identify which should be purchased and which sold. Such decisions are, at the broadest level, a function of whether one thinks interest rates are going to rise or fall. Analysis in this sense identifies securities absolute value. More locally based analysis focuses on 

One method of identifying relative value is to quantify the effect of coupon rates on bond yields. The relationship between the two is expressed in equation (18.2). 

= the coupon of an arbitrary bond whose duration is similar to the par bond s 

When the par bond yield is lower than the coupon of the bond having a similar duration—that is, Cpo rmp, (18.2) reduces to (18.3). 

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