nominal spreads

问题如下：

In preparation for the meeting, Thorn meets with his team to discuss potential fixed income investment strategies. Alex Book, a junior fixed income portfolio manager, updates Thorn on the spread analysis he has used to identify potential trades. Book makes the following statements.

l Statement 1: An increase in interest rate volatility will cause nominal spreads on callable corporate bonds to widen.

l Statement 2: Using putable bonds will allow us to obtain full protection from any large deterioration in an issuer’s credit.

l Statement 3: Buying MBS will add convexity to the portfolio, which will result in a greater benefit from a large change in interest rates.

A. Determine whether each of Book’s three statements is most likely correct. Justify each response.

选项：

解释：

Correct Answer:

Statement 1 is correct. A callable bond is a bond with an embedded short call option. The value of a callable bond is equal to the value of an option-free bond less the value of the embedded option. The value of the embedded call option owned by the issuer will increase as volatility rises, reducing the value of the bond versus a similar option-free bond, thus causing nominal spreads to increase.

Statement 2 is incorrect. A putable bond is a bond with an embedded long put option. An investor buying a putable bond buys a bond with a long put option, giving him the right to redeem the bond before maturity. In the event of significant credit deterioration, the issuer’s ability to meet the put and redeem the bond would be in question.

Statement 3 is incorrect. An MBS is a bond with an embedded short call option. A short call option has negative convexity. Adding more MBS to a portfolio will decrease the convexity of the portfolio and thus result in a smaller (not greater) benefit from a large change in interest rates.