apocalypti

QUOTE:

以下是引用hying01在2007-12-3 9:58:00的发言：

2) bond valuation, formula for computing duration is tested. Although convexity adjustment formula is not tested, the concept of convexity appears in several questions. one of the questions tells you that convexity adjustment for a bond is +1.2%, duration is 10, what is the change of bond price given a 100bps change in rate. another question asks about the convexity of callable bond at different yield level relative to coupon rate. Implied forward rate calculation is tested in one of the questions. Concept of option cost appears in more than one question. e.g. you are asked to select which bond has the highest yield spread, choices are: noncallable bond, callable bond with 1-year deferred call, callable bond with 2-year deferred call, callable bond with 3-year deferred call.

i bet it's 1-year deferred call bond.

Z-spread = OAS + option cost, given all four bond have same OAS, 1-year deferred callable bond has biggest call option cost, therefore has the biggest Z-spread.

apocalypti

QUOTE:

以下是引用lpbell在2007-12-3 16:34:00的发言：
i cannot agree with you about "given all four bond have same OAS",sure they are not same

these four bonds are identical except for the call provision, therefore there OAS should be same.

apocalypti

QUOTE:

以下是引用cathytutu在2007-12-4 10:44:00的发言：

I agree with u regarding the greatest protection for issuers in 1-year deferred call bond.

But I re-considered and chose 3-year deferred call.

Depict from the callable bond curve, call option cost=option-fee bond price - call price.  As the interest rate falls towards zero, the option cost increased a lot. So I guess the longer the deferred call peirod combined with the lower interest rate, the difference between call price and option-free price increased.

That means we investors have to accept the call price set by issues much lower than the market price after 3 years.

It's just my analysis. Welcome for any comment.

[em01]

according to your argument, then 4-year deferred call bond will have bigger spread, and then n-year deferred call bond will have bigger spread if n is bigger. However, non-callable bond could be look as a bond with infinite year deferred call bond, thus has biggest spread. In fact, non-callable should have smallest spread.

so, I could not agree with your argument.