Methodology and Calculations
Hypothetical calculations are for illustrative purposes only and are meant to depict how a fixed income index might behave in different market environments given the (1) current level of yield-to-worst and (2) option-adjusted duration. This analysis assumes that if yields are unchanged, the index’s published yield-to-worst becomes the dominant factor for determining realized return over the time period selected. The analysis also assumes that changes in yields represent a parallel shift in the yield curve occurring at the end of the period, which allows for the full capture/earning of the starting yield-to-worst. The calculation assumes maturing bond proceeds are 100% reinvested at each year’s new starting yield, holding aside convexity effects for simplicity. The likelihood of spreads and duration remaining constant over a 5-year time period is very low. The movement in rates is assumed to occur immediately. The hypothetical yield movements (-1.5% to + 1.5%) were used as they can be considered a potential range of changes in the Corporate Bond Index given the historical trend of yield movements and ranges the market has experienced over the last 30+ years. The hypothetical portfolio assumes a yield-to-worst (5.33 expressed as a whole number) and option adjusted duration (6.81 years), which reflects the characteristics, yield-to-worst and average effective duration, respectively, of the Bloomberg US Corporate Index as of 31 December 2024.
Risk
Investments in debt instruments may decline in value as the result of, or perception of, declines in the credit quality of the issuer, borrower, counterparty, or other entity responsible for payment, underlying collateral, or changes in economic, political, issuer-specific, or other conditions. Certain types of debt instruments can be more sensitive to these factors and therefore more volatile.
Definitions
The Bloomberg U.S. Corporate Index – measures the performance of the U.S. investment grade, fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities with at least one year to final maturity. Hypothetical examples are for illustrative purposes only and are not intended to represent the future performance of any MFS portfolio or investment.
It is not possible to invest in an index.
Yield-to-worst is a measure of the lowest possible yield that can be received on a bond with an early retirement provision. Yield-to-worst is often the same as yield-to-call. Yield-to-worst must always be less than yield-to-maturity because it represents a return for a shortened investment period.
Option-adjusted duration (OAD) is a measure of the price sensitivity to the change in yield. OAD for a bond with an embedded option measures the expected change in cash flow and value caused by changes in market interest rates.
Convexity reflects the rate at which the duration of a bond changes as interest rates change.
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