Eoc # 12: comment 1- callable debt has a smaller option adjusted spread than comparable non callable debt- I think this is correct.
But it’s not- can anyone tell me why not?
Callable debt = debt that is callable by the issuer, not the investor. So that is like being short a call. Options have value to the holder not the seller. In this case, you are the seller, hence it goes against you.
OAS = Zspread - Option value
So since your option would have negative value, your OAS is higher than the Zspread.
Zspread is used to compare bonds with no options. So on a comparable bond with no Optionality, the callable bond will have higher OAS than a comparable non callable bond.
OAS removes the value of the option. Y’all remember this from Level I and Level II.
A callable bond (or a putable) bond should have the same OAS as a comparable option-free bond.
I agree with you and Benjamin, but which seems contradicting to each other. What’s your say on this?
Magician is always correct, listen to what he says.
Which part of your statements are invalid then?
Definitely not always.
But certainly sometimes.
I think Magician explained the same thing in a more straight forward way.
@magician youre the best all the time. whats the deal w the white horse in the avi always been meaning to ask
You’re very kind to say so.
Khaleel was my horse for 14 years; he passed away in March, 2016, at 27.
He was a Kellogg Arabian (from the Kellogg stables at Cal Poly, Pomona), and was awesome.
Yeah i think this carries out from L2 and maybe even L1. The bond issuer has the right to call the bond back before it’s maturity. Therefore then must compensate you that right (or risk from your perspective as the investor). So that’s why you would expect a higher OAS.
Higher than what, exactly?