Bond Math by Donald J. Smith

Author:Donald J. Smith
Language: eng
Format: epub
ISBN: 9781118866368
Published: 2014-10-14T00:00:00+00:00

FIGURE 6.4 Bloomberg Option-Adjusted Spread Analysis Page (OAS1), Fannie Mae Callable Bond

Used with permission of Bloomberg.com © 2014. All rights reserved.

Given the model and, importantly, the assumed level of rate volatility, the option-adjusted spread (OAS) for the Fannie Mae callable bond is determined to be 102.3 basis points. That is the spread over the chosen Treasury security (the 0.625% T-note due February 15, 2017) after subtracting out the value of the embedded call option. The OAS measures the compensation to the investor for the remaining risk factors—that is, default, liquidity, and taxation—and allows for direct comparison to other callable, as well as noncallable, bonds to identify relative value.

There is a lot of bond data on these two Bloomberg pages. It’s up to the fixed-income analyst to identify the information. Consider first the Spread of 142.18 basis points shown in the top left of the Yield and Spread Analysis page. That’s the difference between the yield to call, 1.795488%, and the yield on the indicated benchmark Treasury, the 0.25% T-Note that matures on February 29, 2016. Its yield is 0.373665%. The spread is 1.421823% (= 1.795488% – 0.373665%).

Next, look at the Spread of 456.2 basis points shown in the left side of the OAS1 page. Where does it come from? Well, the yield to maturity on the bond (i.e., assuming away the presence of the call option) is 5.330604%. It’s shown in the middle of the page rounded to three digits, but you can get the full precision on Excel.

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.