HedgeOne addresses all features of even the most complex bonds.
We can define a synthetic bond as the original bond plus all options. The synthetic bond is therefore called a non-option equivalent. For any given term structure, we can derive the price of the bond and the price of the synthetic bond by the contingent-claim model. We can move the term structure in parallel by a spread. Then we can draw two curves as in the following figure. In this figure, the top curve shows the synthetic bond price vs. spread. The bottom curve is the callable bond price vs. spread.
HedgeOne addresses all features of even the most complex bonds.
We can define a synthetic bond as the original bond plus all options. The synthetic bond is therefore called a non-option equivalent. For any given term structure, we can derive the price of the bond and the price of the synthetic bond by the contingent-claim model. We can move the term structure in parallel by a spread. Then we can draw two curves as in the following figure. In this figure, the top curve shows the synthetic bond price vs. spread. The bottom curve is the callable bond price vs. spread.
We also can derive the duration and convexity. In fact, the duration is the tangent line of the lower curve at the OAS point. The convexity is the curvature of the curve at OAS point.
The OAS (option-adjusted spread) derived from the market price is called the actual OAS.
On the other hand, if we know the average option-adjusted spread for the sector and rating, we can derive a theoretical price. We call the theoretical price the fitted price.
Another popular model for callable bonds used among dealers is the Yield-To-Worst model, which calculates the yield based on the worst scenario: it calculates the yield to each call date and takes the worst one. HedgeOne's Yield-To-Worst model includes the case of a sinking fund schedule, if any. (HedgeOne differs in this respect from the most popular system on the street.)
A corporate bond may have any of the following features: call, put, sink, or pay-in-kind options, or a coupon formula expressing the structure of coupon payments. The payments may step up or down, or they may be linked to the interest rate swap curve. In order to cover all possible cases of formulas, HedgeOne has a built-in C expression compiler. The user can enter a formula in the popular C syntax.
For medium-term notes, there are extra-long or extra-short coupon periods. The user enters the issue date and the first coupon date at the Miscellanies page.
Pay-in-kind, and partial pay-in-kind, are features of some high-yield bonds. The coupon (or part of the coupon) is not paid out as cash but paid to the principal. The pay-in-kind feature can also be input at the Miscellanies page. Partial pay-in-kind can be input as a negative sinking fund.
The following shows a sample Corporate Bond dialog window.
A buy-side customer may put a corporate bond into a held-to-maturity portfolio. Such a customer views the corporate bond as a source of cashflows. The following result window reflects the buy-side view.
For a dealer, the corporate bond may be a hedge instrument; therefore, DV01 is important. The following shows the result window corresponding to the dealer's point of view.
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