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1、CHAPTERTHIRTY-NINEOASANDEFFECTIVEDURATIONDAVIDAUDLEY,PH.D.ChiefOperatingOfficerWatchHillInvestmentPartnersRICHARDCHINPortfolioManager––MortgageArbitrageWatchHillInvestmentPartnersSHRIKANTRAMAMURTHYManagingDirectorRBSGreenwichCapitalBondswithembeddedoptionshaveuncertainmaturitiesbeca
2、usethedecisiontoexercisetheoptiongenerallydependsontherelationshipbetweenthelevelofinterestrates,theexercisepriceoftheoption,andthemarketpriceofthesecuri-ty.Issuersofcallabledebtwilltendtocalltheirbondswhenrateshavefallensuf-ficientlytojustifyrefinancingoutstandingdebt.However,theexa
3、cttimingfortheexerciseofthecalloptionisnotalwaysknownbecausethenatureoftheAmerican-styleoptionallowsissuerstoexercisetheircallatanytimebetweenthefirstcalldateandthefinalmaturitydate.Thisoptiontypeisprevalentamongcor-porate,agency,andTreasurysecurities.Thematuritiesofbondswithembedded
4、putoptionsareknownwithslightlymorecertaintybecauseinvestorswilleitherredeemthebondsontheputdateorholdthemtofinalmaturity(assumingthattherearenootherembeddedoptionsinadditiontotheoneputoption).Thepresenceofanembeddedoptioncomplicatesthebond-valuationprocessbecausethebond’smaturitydat
5、eisuncertain.Itisnotalwaysclearwhetherthebondshouldbeanalyzedaccordingtoitsfinalmaturity,firstcallorputdate,orparcalldate,forexample.Considera30-yearcallableutilitybondwithfiveyearsofcallprotectionandagivenlevelofinterest-ratevolatility.Fromaprice-sensitivitystandpoint,doesthebondbeha
6、vemorelikea30-yearbond,afive-yearbond,oranintermediate-maturitybond?Fromacompensationstandpoint,aretheyieldspreadThischapterwaswrittenwhenDavidAudleyandRichardChinwereemployedbyPrudentialSecurities.897Copyright©2005,2001,1997,1995,1991,1987,1983byTheMcGraw-HillCompanies,Inc.Clickher
7、efortermsofuse.898PART5ValuationandAnalysisandoption-adjustedspread(OAS)commensuratewiththelevelofinterest-raterisk?Theabilitytoquantifythepricesensitivityofaparticularbondisanecessarystepingaugingtherisk/rewardtrade-offsinherentinanyonebond.Furthermore,thehedgingofsuchbondsrequire
8、shavingthemeanstocalculate
