Midterm Part D

Question 1

define Nominal Spread

Answer 1

Nominal Spread: measures the absolute spread between a Non-Treasury Bond and a Treasury Bond

Benchmark: YTM Curve
Compensates for: credit risk, liquidity risk, option risk

Question 2

Define Zero Volatility Spread

Answer 2

Zero Volatility Spread: is a constant spread that needs to be added to the Treasury yield curve to make the price of a bond equal to the present value of its cash flows.

Benchmark: Treasury Spot Rate Curve
Compensates for: credit risk, liquidity risk, option risk

Question 3

Define Option-Adjusted Spread

Answer 3

Option-Adjusted Spread (OAS): takes the dollar difference between the value and market price and converts it into a yield spread

Benchmark: Treasury Spot Rate Curve
Compensates for: credit risk, liquidity risk