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Z-spread
The Z-spread, ZSPRD, zero-volatility spread or yield curve spread of a bond is the parallel shift or spread over the zero-coupon Treasury yield curve required for discounting a pre-determined cash flow schedule to arrive at its present market price. The Z-spread is also widely used in the credit default swap (CDS) market as a measure of credit spread that is relatively insensitive to the particulars of specific corporate or government bonds. Since the Z-spread uses the entire yield curve to value the individual cash flows of a bond, it provides a more realistic valuation than an interpolated yield spread based on a single point of the curve, such as the bond's final maturity date or weighted-average life. However, the Z-spread does not incorporate variability in cash flows, so a fuller valuation of an interest-rate-dependent security often requires the more realistic (and more complicated) option-adjusted spread (OAS). Definition The Z-spread of a bond is the number of basis ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Option-adjusted Spread
Option-adjusted spread (OAS) is the yield spread which has to be added to a benchmark yield curve to discount a security's payments to match its market price, using a dynamic pricing model that accounts for embedded options. OAS is hence model-dependent. This concept can be applied to a mortgage-backed security (MBS), or another bond with embedded options, or any other interest rate derivative or option. More loosely, the OAS of a security can be interpreted as its "expected outperformance" versus the benchmarks, if the cash flows and the yield curve behave consistently with the valuation model. In the context of an MBS or callable bond, the embedded option relates primarily to the borrower's right to early repayment, a right commonly exercised via the borrower refinancing the debt. These securities must therefore pay higher yields than noncallable debt, and their values are more fairly compared by OAS than by yield. OAS is usually measured in basis points (bp, or 0.01%). For a s ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
I-spread
The Interpolated Spread or I-spread or ISPRD of a bond is the difference between its yield to maturity and the linearly interpolated yield for the same maturity on an appropriate reference yield curve. The reference curve may refer to government debt securities or interest rate swaps or other benchmark instruments, and should always be explicitly specified. If the bond is expected to repay some principal before its final maturity, then the interpolation may be based on the weighted-average life, rather than the maturity. See also * Asset swap spread * Option-adjusted spread * Z-spread The Z-spread, ZSPRD, zero-volatility spread or yield curve spread of a bond is the parallel shift or spread over the zero-coupon Treasury yield curve required for discounting a pre-determined cash flow schedule to arrive at its present market pr ... References Bond valuation Fixed income analysis {{Econ-stub ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Asset Swap Spread
In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that can be converted into cash (although cash itself is also considered an asset). The balance sheet of a firm records the monetaryThere are different methods of assessing the monetary value of the assets recorded on the Balance Sheet. In some cases, the ''Historical Cost'' is used; such that the value of the asset when it was bought in the past is used as the monetary value. In other instances, the present fair market value of the asset is used to determine the value shown on the balance sheet. value of the assets owned by that firm. It covers money and other valuables belonging to an individual or to a business. Assets can be grouped into two major classes: tangible assets and intangible assets. Tangible assets contain various subclasses, inclu ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Embedded Option
An embedded option is a component of a financial bond or other security, which provides the bondholder or the issuer the right to take some action against the other party. There are several types of options that can be embedded into a bond; common types of bonds with embedded options include callable bond, puttable bond, convertible bond, extendible bond, exchangeable bond, and capped floating rate note. A bond may have several options embedded if they are not mutually exclusive. Securities other than bonds that may have embedded options include senior equity, convertible preferred stock and exchangeable preferred stock. See Convertible security. The valuation of these securities couples bond- or equity-valuation, as appropriate, with option pricing. For bonds here, there are two main approaches, as follows. [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Credit Risk
A credit risk is risk of default on a debt that may arise from a borrower failing to make required payments. In the first resort, the risk is that of the lender and includes lost principal and interest, disruption to cash flows, and increased collection costs. The loss may be complete or partial. In an efficient market, higher levels of credit risk will be associated with higher borrowing costs. Because of this, measures of borrowing costs such as yield spreads can be used to infer credit risk levels based on assessments by market participants. Losses can arise in a number of circumstances, for example: * A consumer may fail to make a payment due on a mortgage loan, credit card, line of credit, or other loan. * A company is unable to repay asset-secured fixed or floating charge debt. * A business or consumer does not pay a trade invoice when due. * A business does not pay an employee's earned wages when due. * A business or government bond issuer does not make a payme ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Market Liquidity
In business, economics or investment, market liquidity is a market's feature whereby an individual or firm can quickly purchase or sell an asset without causing a drastic change in the asset's price. Liquidity involves the trade-off between the price at which an asset can be sold, and how quickly it can be sold. In a liquid market, the trade-off is mild: one can sell quickly without having to accept a significantly lower price. In a relatively illiquid market, an asset must be discounted in order to sell quickly. Money, or cash, is the most liquid asset because it can be exchanged for goods and services instantly at face value. Overview A liquid asset has some or all of the following features: It can be sold rapidly, with minimal loss of value, anytime within market hours. The essential characteristic of a liquid market is that there are always ready and willing buyers and sellers. It is similar to, but distinct from, market depth, which relates to the trade-off between qua ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Net Present Value
The net present value (NPV) or net present worth (NPW) applies to a series of cash flows occurring at different times. The present value of a cash flow depends on the interval of time between now and the cash flow. It also depends on the discount rate. NPV accounts for the time value of money. It provides a method for evaluating and comparing capital projects or financial products with cash flows spread over time, as in loans, investments, payouts from insurance contracts plus many other applications. Time value of money dictates that time affects the value of cash flows. For example, a lender may offer 99 cents for the promise of receiving $1.00 a month from now, but the promise to receive that same dollar 20 years in the future would be worth much less today to that same person (lender), even if the payback in both cases was equally certain. This decrease in the current value of future cash flows is based on a chosen rate of return (or discount rate). If for example there exi ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Amortization (business)
In accounting, amortization refers to expensing the acquisition cost minus the residual value of intangible assets in a systematic manner over their estimated "useful economic lives" so as to reflect their consumption, expiry, and obsolescence, or other decline in value as a result of use or the passage of time. The term amortization can also refer to the completion of that process, as in "the amortization of the tower was expected in 1734". Depreciation is a corresponding concept for tangible assets. Methodologies for allocating amortization to each accounting period are generally the same as these for depreciation. However, many intangible assets such as goodwill or certain brands may be deemed to have an indefinite useful life and are therefore not subject to amortization (although goodwill is subjected to an impairment test every year). While theoretically amortization is used to account for the decreasing value of an intangible asset over its useful life, in practice many ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
PSA Prepayment Model
The PSA Prepayment Model is a prepayment scale developed by the Public Securities Association in 1985 for analyzing American mortgage-backed securities A mortgage-backed security (MBS) is a type of asset-backed security (an 'instrument') which is secured by a mortgage or collection of mortgages. The mortgages are aggregated and sold to a group of individuals (a government agency or investment ba .... The PSA model assumes increasing prepayment rates for the first 30 months after mortgage origination and a constant prepayment rate thereafter. This approximates real-world experience that during the first few years, mortgage borrowers: * are less likely to relocate to a different home, * are less likely to refinance into a new mortgage, and * are less likely to make extra payments of principal. The standard model (also called "100% PSA") works as follows: Starting with an annualized prepayment rate of 0.2% in month 1, the rate increases by 0.2% each month, until it reaches 6% in ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Prepayment Of Loan
Prepayment is the early repayment of a loan by a borrower, in part or in full, often as a result of optional refinancing to take advantage of lower interest rates.Lemke, Lins and Picard, ''Mortgage-Backed Securities'', Chapter 4 (Thomson West, 2013 ed.). In the case of a mortgage-backed security (MBS), prepayment is perceived as a financial risk—sometimes known as "call risk"—because mortgage loans are often paid off early in order to incur lower interest payments through cheaper refinancing. The new financing may be cheaper because the borrower's credit has improved or because market interest rates have fallen; but in either of these cases, the payments that ''would have been made'' to the MBS investor would be above current market rates. Redeeming such loans early through prepayment reduces the investor's upside from credit and interest rate variability in an MBS, and in essence forces the MBS investor to reinvest the proceeds at lower interest rates. If instead the borrower' ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
