Numbers will be displayed on screen along with other results when a volatility is found on the Ctrl-O OAS Control Screen. Numbers will also appear on the term sheet.
Numbers agree with Bloomberg's OAS1 screen for non-sinking fund bonds. Bloomberg's numbers for amortizing bonds are not correct [as of 1994].
OAS Input Screen: where one can control volatility and have it change over time. The user also has control over the normally neutral probability assumption about rates going up or down (also controllable over time). 3-D skyscraper graphs are available for the binomial probability distribution and the risk free rates.
OAS backsolving capability. Can enter the OAS spread or the Option Free Yield in the Yield Input Field. Append +O behind a spread for the OAS spread and +F behind any form of yield input for Option Free Yield. Entering +FD will find the Option Free Yield assuming maximum double-ups taken.
The portfolio report writer has eight columns to cover the OAS numbers.
OAS Convexity - See discussion under OAS Duration.
OAS Duration - or sometimes called Effective Duration is an
improvement on modified duration as it incorporates the actual
price changes resulting from specified shifts in interest rates.
To calculate: (1) the benchmark curve is parallel shifted by a
nominal amount (see ^O screen), (2) the implied spot and forward
rates are recalculated, and (3) holding volatility and OAS
constant a new price is solved for.
OAS Price if Bullet - or Option-Free Price, is the implied price
for a non-call issue with the identical coupon and maturity. It
is the cost of the issue without the short position in the
embedded call option. Sinking funds, if any, are included.
OAS Price Value of an 01 - This is called Risk by the Bloomberg
system. See discussion under OAS duration.
OAS Spread - is the additional return expected to be generated by
the issue over its term relative to the risk-free return of a
benchmark bond. It is the constant spread that has to added to
each of the short rates in the binomial tree to get it to solve
for the observed price. If there were no calls or puts then
this would be the same as the Static Spread.
OAS Value - or Option Value. It is the value of the embedded
option and is the difference between the observed price of the
bond (with embedded calls) and the price of a hypothetical
bullet bond with the identical coupon and maturity. This
hypothetical price is calculated using the OAS Spread
calculated previously.
Option Free Spread - is the spread between the Option-Free Yield
and the benchmark rate at the issue's average life to maturity.
Option Free Yield - is the cash flow yield to maturity associated
with the bond's option-free price and represents the yield of
the underlying bullet.
OAS pricing when matrix pricing: Yields built from the spread matrices will be the option free yields for the securities. BondCalc will iteratively solve for the price that will give this yield. When the issue has sinking fund double-ups the program will take the lower of the price calculated using maturity flows and the one calculated assuming maximum double-ups taken. To activate set Matrix Pricing Type Field on Shft-F6 Portfolio Parameter Screen. In the single security section the OAS matrix price will appear as the average on the report, which matrix prices to each call date. See How-to notes on F1 at program top for more explanation.
OAS Control Variables
Interest Rate Volatility - An entry is needed here (or enter a Term
Structure on optional F7 popup input) to turn on the OAS pricing
feature. Enter as a percent. To see what the numbers look like
with 0% volatility then enter .0000001 in this field. See next.
Pop-up Input Alternative - Enter volatilty numbers in percent that
will be in effect for that year. Only enter at the points of
change. Program will carry input through blank rows.
Options
Probability that Interest Rates will Increase - Usually 0.5. But
market participants usually expect that rates have a propensity
to move in one direction over the other. Use next field to turn
off after a few years or use F8 to control changing probabilities
by year.
Years Before Dropping Back to 0.5/0.5 - Time frame before turning
previous field back to default probability.
Pop-up Input Alternative - Enter probability numbers that will be
in effect for that year. Numbers must be less that 1. Only enter
at the points of change. Program will carry input through blank
rows. Last number entered should be .5 to return probability back
to neutral.
Effective Duration Deltas - When measuring a bond's effective
duration BondCalc shifts the benchmark yield curve by a nominal
amount. Using new forward spot rates, and holding volatility and
the bond's OAS constant, a new bond price is solved for. Using
this, the OAS Duration and other measures of a bond's price
sensitivity to changes in interest rates can be calculated.
Also Calculate when No Calls Present - By default BondCalc does not
expend the overhead to calculate OAS when there are no calls
present, except when backsolving with OAS. Entering a 1 here
will allow testing to see that there is no option value when
there are no calls. This flag will also turn on OAS for bonds
with greater than 30 years to maturity, as they take a long time
to calculate.
Opt Key Years for Partial Durations - If these are blank the
partial durations will be broken into the benchmark years on the
used yield curve. These override. A 0.5 year one will always be
included.