Callable bonds and other fixed income securities having embedded options cannot be valued using traditional methods such as modified duration. Further, while noncallable corporate bonds are priced relative to a credit spread to US Treasuries, bonds with embedded call options trade on an option adjusted spread (OAS) to Treasuries. This course will define OAS and introduce effective duration as the appropriate risk measure for bonds with embedded options. Computer software is used to understand which variables affect OAS, including interest rate changes, shifts in the yield curve, and volatility.

Objectives

By the end of the program the course participant will be able to:

• Explain OAS and effective duration
• Define and calculate negative convexity and how it affects bonds with embedded options
• Identify and measure the variables that affect OAS with specially designed computer software
• Examine the appropriate Bloomberg screens and how they are used by market practitioners

People who require a better understanding of how bonds with call options trade such as:

• Trading and sales personnel
• Supporting functions of fixed income and derivatives trading desks
• Risk Managers
• Asset/Liability Management Analysts
• Auditors and regulators evaluating fixed income portfolios with optionality