Let's say you have a loan at L+250 and is trading at 98 and LIBOR is at 1%. My understanding is that the yield, assuming a 4-year average life, is 1% + 2.50% + (2*0.25%) = 4.0% My question is WHY is each point of OID equal to 25 bps? And also why do we assume a 4-year avg. life? Just because it'll likely get refinanced in ~4 yrs?
Bonus question: when taking a loan to market, lets say you have 100 bps of flex for OID - you multiply by 4 so you can issue at 96. Again, why do you multiply by 4? Know this is convention but feel like I'm missing 1 or 2 pieces to make it click, thanks guys.
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