OAS Doubt friends, please, particular, security, understand

Foufou

Hi friends,

Could you please help me understand the below statement -
"If a particular security by the issuer is fairly priced, its OAS should be equal to zero".

Any help to understand this statement is highly appreciated, thank you friends.

Regards,
Gopal.

Darien

Hey Gopal, are you talking about using OAS as a relative valuation tool when the benchmark is the issuers own securities?

This may be wrong but I have always found it useful to think this way:

P(issuer's securities)= CFs/(1+r)^t
P(issuer's security under consideration) = CFs/(1+r+OAS)^t

if OAS = 0 then P(issuer's securities) = P(issuer's security under cnosideration) and security under consideration is fairly priced RELATIVE to the price of the issuer's other securities.

if OAS > 0 then P(issuer's securities) > Price(security under consideration) and security under consideration is under priced RELATIVE to the price of the issuer's other securities.

if OAS < 0 then P(issuer's securities) < Price(security under consideratoin) and security under consideration is over priced RELATIVE to the price of the issuer's other securities.

Hope this made sense!

______________________________________________________
You must be the square root of two cause i feel irrational around you



Edited 1 time(s). Last edit at Monday, August 29, 2011 at 09:39AM by Alladin.

tobeornottobe

Hi Alladin,

After reading my post again realized that I didnt actually give you complete information.

But you have answered my exact doubt and thanks a ton for that Your method really does help in understanding/remembering it! thank you mate

Regards,
Gopal.

tkrock

回复 2# Darien


Dear Darien,
I encountered some trouble on this, that the text saying" while the volatility go up, the OAS will down for callable bonds".
how can you explain on this with the method?

volatility up,
callable bond value down,
PV callable bond down, and the (1+r+OAS)^t  should go up,
so shouldnt OAS go up?

also, is there a way to clarify the Z>OAS from the mathematical aspect?

Most annoying question in Fixed income.
Hope you are here and thank you in advanced.
so nice to see you are using the same method as i did.