I hated fixed income in school. In fact I'm pretty sure I fell asleep more than once during a lecture on the effects of roll down on total return and the difference between G and Z spreads. The only G spread I cared about had nothing to do with bonds, but whatever. Point is, Fixed income is pretty intimidating at a first glance. All these different securities with unique little qualities all driven by all kinds of crazy math. Oh shit! I'll break the aura for you, there isn't much crazy math involved and actually if you sit and take a harder look at Fixed income securities they are pretty awesome. Most of this isn't new to a lot of people on here, but considering I've seen so many help posts and it is that time of year again I thought it might be useful to throw out there.
Everyone is pretty familiar with your standard bond with a bullet maturity. Nothing new or exciting there. Callable's, though, are actually really cool instruments when you break them down. Actually a lot of those are bought here, as many times they provide pretty decent value when volatility is spiking up. Callables are a bond with an embedded option which is short volatility. Callable = bullet - option price. Conversely, you could just create a position like that buy buying a standard bullet and then shorting an option against that with a maturity equal to what would have been the call date. Obviously, if your trading bonds, your not worried about holding it through maturity but rather you are expressing a view about volatility and associated interest rate moves. If rates start backing up and volatility increases it is always worth taking a look at callables, and especially some callable agencies will still offer value in sections of the curve.
Anyway, I don't know if any of you actually care about fixed income. There are a million things (and lots of stuff I still have no idea about) but If your interested I'm happy to answer any questions or attempt to explain something.
what's your preferred method for valuing american options on any FI product?
Hi Addinator,
If I want to value a non-callable corporate bond, on an absolute basis, how do I detremine the spreads needed to add to each spot rate on my treasury spot-rate curve to come up with the correct discount rates? Say for example this is a 5 year bond issued by a BBB+ rated issuer paying semi-annually, would I just look at what the historical BBB+ spreads to treasuries have been and use those spreads?
Thanks
100 bucks says the genius aces the answer
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