can anyone explain this to me in a way I can understand? I must have a mental block here, because I just can’t seem to get any questions in this area correct. what am i looking for?
same problem here!!!
well damn, now I feel a little better. Any FI junkies out there care to lend a hand?
depends on the benchmark. if you post a question I might be able to help. I am no expert though.
A large OAS relative to the required OAS (which is often not given) indicates an undervalued security. Similarly a small OAS relative to the required OAS indicates an overvalued security. Here’s how I think about it. We all know that a bond’s yield and price are inversely related. If I buy a ton of a certain bond in the marketplace, its price will INCREASE based on the demand and increased bid, but its YTM will DECREASE as a result of the increased price. Think of the OAS as another way of looking at YTM (which it is, really). As the price goes up, the YTM gets smaller, and vice versa. So, say the OAS for Company Bond A is 50bps, and its required OAS is 100bps. You know that the OAS has decreased from the required OAS for some reason, and based on the above paragraph, we know that reason is that someone has been jacking the price UP by buying a ton of it, making it overvalued. If an OAS is LARGE relative (150bps) to the required OAS (100bps again), the price must have been dropping because someone is selling it, making it undervalued. Does that help?
that does help yes. But what do we do if they don’t give us a required OAS (which seems to be most questions) I know it’s a benchmark comparison, but I get confused as to what I’m looking for vs. treasury’s or an issuer benchmark.
Read LOS 55 a&g (pgs 85-87 in book 5) and let me know specifically what confuses you.
thanks Cube - I think i got it - just cracked the CFA fixed income book - theres a nice table summary on pg. 273, think I’m just gonna commit that one to memory and call it a day.