Module 44.4 & 44.5: Yield Curves & Spreads Flashcards
How do you calculate spot rates from forward rates?
geometric mean formula, (1 + spot 1)*(1 + spot2) * (1 + spot 3) ^ (1/3)
average mean is a very close approximation
How do you calculate forward rates from spot rates? use an example when given a 2 year spot rate and a 1 year spot rate, and asked for a forward rate 1 year from now.
formula would be spot rate for 2 years ^ 2 / spot rate for 1 year
What is a G-spread?
a yield spread over a government bond
Why is it important to analyze a floating rate note increase in yield by the spread?
if it’s driven by microecnomic factors, it’ll be driven by an increase in the spread, not the underlying benchmark.
What is the zero-volatility or z-spread?
an appropriate yield curve that takes into account the upward sloping nature of yield curve
What is the formula for z-spread? how is it calculated?
add “ZS” to the spot rates and solve for ZS when given the current price and the spot rates.
What is the option-adjusted spread “OAS”?
would be the yield to the government spot rate curve if the option spread was removed.
How is OAS calcualted?
if there is a callable bond, the OAS will be less than the Z-spread. The difference is the extra yield required to compensate bondholders for the call option.
OAS = Z-spread - option value
