Question regarding Putable Bond, OAS, and Volatility between, question, increase, regarding

lc26mizzou

I faced this question and I need your help.

Can any please tell the link between OAS and Volatility with respect to putable bond? Suppose if Volatility increase (decreases) what effect would it have on OAS?

Chuckrox

I thought OAS was the spread after removing effects from embedded options. So, holding all else equal, OAS should not be influenced by changes in volatility.

Houjichasan

In curriculum there was a line written when there is an increase in volatility the OAS decreases for callable bonds. I was unable to understand this. Moreover what about putable bonds? Is the relation mentioned for callable bonds similar to putable bonds or different. Please help.

lift1

回复 3# Houjichasan

Found from other websites:

The original source is on Page 12 of Unit 19, BPP (BPP professional education).

The OAS will depend on the volatility parameter- sigma. For a given bond price, high interest-rate volatility makes the OAS:
* lower for a callable bond
* higher for a putable bond


Think it this way: OAS = Market Yield - Theoretical Yield

If you increase the volatility assumption in your model, the theoretical yield on the callable bond will increase. However, the actual market yield doesn't change by you playing with your Excel. This, the OAS goes down just as the good folks at BPP said.

sanbaidaniella

回复 4# lift1


   Absolutely correct. Is the test gonna tested on this detailed though?