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10 Cards in this Set
- Front
- Back
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OAS |
> extra spread added to TSY notes in a binomial tree > for corporate credit and liquidity risk > not for option risk (dealt with cash flow in the tree) for call options: OAS = z-spread - spread for call option (or yield required) for put options: OAS = z-spread + yield forgone for having the put option |
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Duration and Convexity |
Duration = (P- - P+) / (2 x P0 x ch in r) Convexity = (P- + P+ - 2P0) / [P0 x (ch in r)^2] %ch in price = - (Duration x ch in Y) + 0.5 [Convexity x (ch in Y)^2] |
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Conversion value |
Underlying stock price x conversion ratio |
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Market conversion price |
convertible bond price / conversion ratio |
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Market conversion premium per share |
market conversion price - underlying share price |
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Market conversion premium ratio |
market conversion premium per share / underling share price |
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Value of convertible bond |
value of straight + value of equity call option |
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Effect of stock price movement on convertible bond |
fall in stock price = behave like straight bond rise in stock price = conversion more likely to happen; behave like stock |
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Effect of yield volatility to OAS |
putable bond = decrease in volatility leads to decrease in value for putable bond; computed OAS decreases (OAS needed to force model price to be equal to market price will be lower) |
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Theories of term structure of interest rates |
1. Unbiased/Pure expectations theory: fwd rates unbiased predictor of spot rates 2. Local expectations theory: same as no.1 but only for short term; premiums exist in LT 3. Liquidity preference: include a liquidity premium for interest rate risk; fwd rates upwardly biased estimates of future rates 4. Segmented markets: preference of borrowers and lenders determine yield (supply and demand), not liquidity or expected spot rates 5. Preferred habitat: fwd rates = spot rates + premium; but premium not directly related to maturity but from supply and demand for funds in a maturity range |
