_12 Valuing Risk Debt II Callable Bonds 2013 - VALUING RISKY DEBT II CALLABLE BONDS REFERENCE Fabozzi F.J(2004 Bond Markets Analysis and Strategies(5th

_12 Valuing Risk Debt II Callable Bonds 2013 - VALUING...

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VALUING RISKY DEBT II CALLABLE BONDS REFERENCE: Fabozzi, F.J. (2004). Bond Markets, Analysis and Strategies, (5th ed) New Jersey: Prentice-Hall, Chapter 16, pp. 343-373. The notes that follow draw heavily from Fabozzi - Chapter 16. DRAWBACKS OF TRADITIONAL YIELD SPREAD ANALYSIS Consider two 8.8 % coupon 25-year bonds paying interest semi-annually: ISSUE PRICE YIELD TO ($) MATURITY (%) Treasury 96.6133 9.15 Corporate 87.0798 10.24 The yield spread is difference between 10.24% and 9.15%, that is 1.09% or 109 basis points (BP). However, the traditional yield spread ignores the term structure of interest rates existence of embedded options - callable/putable bonds
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2 STATIC SPREAD: AN ALTERNATIVE TO YIELD SPREAD DEMONSTRATION EXAMPLE: FABOZZI 16-2 Is the static spread for a three-year 9% coupon corporate bond selling at $105.58 given the theoretical Treasury spot rate below, 50, 100, or 200 basis points? PERIOD SPOT RATE (%) (NOTE RATE QUOTED P.A.) 1 4.0 2 4.2 3 4.9 4 5.4 5 5.7 6 6.0 The static spread is a measure of the spread an investor would realize over the entire Treasury spot rate curve if the bond is HELD to MATURITY.
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  • Spring '17
  • callable bond, one-year forward rate, callable bond price, noncallable bond price

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