You are considering the purchase of a callable corporate, Ask an Expert

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You are considering the purchase of a callable corporate bond. You have two analytical systems available to you to value the bond. In one system, System A, the vendor uses the on-the-run Treasury issues to construct the theoretical spot rate that is used to construct a model to compute the OAS. The other analytical system, System B, uses the on-the-run issue for the particular issuer in constructing a model to compute the OAS.

a. Suppose that using System A, you find that the OAS for the callable corporate you are considering is 50 basis points. How should you interpret this OAS value?

b. Suppose that using System B, you find that the OAS computed is 15 basis points. How should you interpret this OAS value?

c. Suppose that a dealer firm shows you another callable corporate bond of the same credit quality and duration with an OAS of 40 basis points. Should you view that this bond is more attractive or less attractive than the issue you are considering for purchase?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92647542

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