Duration of Repo; High Yield Securities

  1. Just ran into a question to calculate duration of repo. They use the number of repo day divided by 360 to get it. Why can we calculate duration in this? I just don’t recall any formula on this.

The duration of the repo is very close to zero or 30/360 = 0.08.

2.Why would high yield securities not consider credit spread volatility and default? I thought high yield securities have high credit spread volatility and default risk, right?

Thank you!

what’s the Q# and Page? or copy and paste the question and answer.


Please don’t advocate that he post copyrighted material. It’ll mean that I have to come in and delete it, and, frankly, I don’t need the extra work.

A repo is essentially a zero-coupon bond, whose Macaulay duration is its time to maturity: # of days divided by 360 (or 365; whatever). Its modified duration is its Macaulay duration divided by (1 + YTM), where the YTM is the effective yield for the length of the repo; the YTM’s pretty close to zero, so the Macaulay duration is good enough.

What makes you think that they don’t consider them?

Great to know! Totally forgot all the different durations now.

For the second one. it is on page 249 book 2 of Kaplan.

It states " OAS has been the preferred way to measure spread for investment grade securities. It is less suited to evaluating high yield securities because it does not consider credit spread volatility and default."

At first, I thought it meant high yield securities until I wrote everything down just now…

Thanks for all your help!!

It’s OAS that doesn’t consider credit spread volatility and default (i.e., doesn’t eliminate them as it eliminates the optionality), not the bonds themselves.

Yes, that is what I realized. Thanks for your help! Really appreciate it!

Please can magician give example for comparison between high yield and embedded option bonds using OAS?? I have always been struggling with these spread analysis since level 1.I think magicians’ explanation will make more sense to me using examples.Your help will be appreciated.