LM7: Yield and yield spread measures for fixed-rate bonds

street convention yields

which assume that payments are made on schedule dates, neglecting weekends and bank holidays

true yields

which account for weekends and bank holidays

government equivalent yield

• restates a YTM based on a 30/360 day count to one based on an actual/actual day count

• it is used to restate the YTM on a corporate bond to obtain the spread over the government YTM

callable bonds

• the yield-to-worst is the lowest of the sequence of yields-to-calls and the YTM

• the option-adjusted yield is the YTM whereby the bond price is adjusted for the value of the call option

YTM

can de decomposed into a benchmark rate and a spread

benchmark rates

reflect macroeconomic, top-down conditions that affect all bonds in a market

spreads

capture issuer-specific, bottom-up factors, such as credit risk, liquidity, and taxation

G-spread

is the yield spread of a bond over an actual or interpolated government bond yield with the same tenor

I-spread

is the yield spread of a bond over the standard swap rate in the same currency and with the same tenor

Z-spread

is a constant yield spread over a government (or interest rate swap) spot curve such that the PV of the CFs matches the price of the bond

option-adjusted spread (OAS) on a callable bond

is the Z-spread adjusted for the value of the embedded call option

OAS

= Z - spread - option value in basis point per year

option cost

= Z-spread - OAS

for callable bond

OAS < Z-spread

for puttable bond

OAS > Z-spread