Introduction to Option-Adjusted Spread Analysis: Revised and Expanded Third Edition of the OAS Classic by Tom Windas

177 Pages·2007·1.19 MB·English

by  Miller

Praise for this new edition of
Introduction to Option-Adjusted Spread Analysis
“O ption-adjusted spread analysis is as widely used as it is misun­
derstood. Tom Miller’s update of this fixed-income classic is a
paragon of clear thinking and clear writing. The road to under­
standing how OAS is computed and implemented begins here.”
steven v. mann, phd
Professor of Finance, Moore School of Business,

University of South Carolina

Coeditor, The Handbook of Fixed Income Securities

And praise for the previous edition
“L ucid and well-written, Option-Adjusted Spread Analysis focuses
on the evaluation of put, callable, and sinking fund bonds
… a top-quality job.”
DERIVATIVES STRATEGY
“T his introductory book boils each complex concept down to the
basics … For those who need to know the calculations behind
the numbers on their Bloomberg screen, this is a neat, to-the­
point little textbook: How to determine fair value of bullet and
nonbullet bonds, the role of volatility, the binomial tree of short
rates, and applications of OAS analysis are some of the subjects
covered.”
FUTURES
“ Tom Windas opens the black box of option-adjusted spreads.
Practical examples, excellent graphics, and clear explanations
guide the reader to an understanding of bond valuation. Unlike
academic discussions of valuation techniques, this book is not just
for the ‘rocket scientist,’ but is for every investor.”
andrew davidson
President, Andrew Davidson & Co., Inc.

New York
Introduction to
Option-Adjusted Spread

Analysis
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Introduction to
Option-Adjusted Spread

Analysis

Revised and Expanded Third Edition
of the OAS Classic by Tom Windas
◆
Revised by
T M
OM ILLER
Foreword by PETER WILSON
BLOOMBERG PRESS

NEW YORK
© 1993, 1996, 2007 by Bloomberg L.P. All rights reserved. Protected under the Berne
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First edition published 1993
Second edition published 1996
Third edition published 2007
1 3 5 7 9 10 8 6 4 2
Library of Congress Cataloging-in-Publication Data
Miller, Tom
Introduction to option-adjusted spread analysis : revised and expanded third edition
of the OAS classic by Tom Windas / revised by Tom Miller ; foreword by Peter Wilson.
p. cm.
Summary: “Explains option-adjusted spread analysis, a method for valuing bonds
with options. This book takes readers through each step of the calculation”--Provided by
publisher.
Includes bibliographical references and index.

ISBN-13: 978-1-57660-241-6 (alk. paper)

ISBN-10: 1-57660-241-9

1. Fixed-income securities. 2. Option-adjusted spread analysis. I. Windas, Tom.
Introduction to option-adjusted spread analysis. II. Title.
HG4650.M56 2007
332.63'2283--dc22 2006101298
Dedicated to the curious and those who teach us.
CONTENTS

Foreword ix

by Peter Wilson
Acknowledgments xi

Introduction: Why OAS Analysis? 1

PART ONE

Yield Analysis Versus OAS Analysis 5

C H A P T E R 1

Fatal Flaws in Traditional Yield Calculations 7

C H A P T E R 2

The Bond as a Portfolio 15

PART TWO

Valuing Options 27

C H A P T E R 3

Intrinsic Value 29

C H A P T E R 4

Time Value 33

PART THREE

Modeling Interest Rates 41

C H A P T E R 5

Implied Spot and Forward Rates 43

C H A P T E R 6

Beyond the Lognormal Model 53