Option Adjusted Spread

Abstract

All readily priced instruments should be valued daily, less-readily priced instruments at least weekly and non-readily priced instruments as often as feasible and whenever a material event occurs. The pricing mechanism and methodologies must be known, understood, follow written policies and be applied consistently. Interest Rate, Term Structure, and Valuation Modelling is a valuable practitioner-oriented text that thoroughly reviews the interest rate models and term structure models used today by market professionals and vendors of analytical services. This paper revisits the question of the Option Adjusted Spread Analysis such a tool used by market professionals to analyze and compare bonds with embedded options. Provides a working knowledge of why yield-based analysis breaks down for non-bullet bonds, modelling put and call provisions as embedded options, intrinsic and time components of option values, and other aspects of bond trading.