can someone pls help me to understand what’s going on with question 11 from the BB reading 14 specifically 11.b
they said the index OAS widens, but i don’t understand where the calculation is coming from
It’s a horrible explanation.
Note the sentence from the previous page: “As noted earlier, spread changes for lower-rated bonds tend to be consistent on a proportional percentage rather than absolute basis . . . .”
Therefore, if the index OAS changes 10 bps (out of 125 bps) – an 8% (relative) change – then the A-rated bond’s OAS should change by about 8% of 100 bps or 8 bps, and the BB-rated bond’s OAS should change by about 8% of 300 bps or 24 bps. The change in the portfolio value should be about:
\left(0.5 × 8\ bps × 3.0\right) + \left(0.5 × 24\ bps × 4.0\right) = 60\ bps
Algebraically, this works out to be what they showed, but, as I say, their explanation is awful.
1 Like