Beruflich Dokumente
Kultur Dokumente
by Frank J. Fabozzi
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These measures do not consider the effect of embedded options (reinvestment or call features).
Zero-Volatility Spread
The zero-volatility or Z- spread is a measure of the spread the investor would realize over the entire Treasury spot rate curve if the bond is held to maturity.
It is not the spread off of one point on the Treasury yield curve (nominal spread), it is an average over all spot rates.
The Z-spread is also called a static spread and is calculated as the spread which will make the present value of the cash flows from the non-Treasury bond, when discounted at the Treasury spot rate plus the spread, equal to the non-Treasury bonds price.
Trial and error is used to determine the Z-spread.
Convertible Securities
Convertible and exchangeable securities can be converted into shares of common stock. The conversion ratio is the number of common stock shares for which a convertible security may be converted. Almost all convertible securities are callable and some are putable.
Convertible Securities
The conversion value is the value of the convertible bond if it is immediately converted into the common stock. The market conversion price is the price that an investor effectively pays for the common stock if the convertible security is purchased and then converted into the common stock. The premium paid for the common stock is measured by the market conversion premium per share and market conversion premium ratio. The straight value or investment value of a convertible security is its value if there was no conversion feature. The minimum value of a convertible security is the greater of the conversion value and the straight value.
Convertible Securities
A fixed income equivalent (or a busted convertible) refers to the situation where the straight value is considerably higher than the conversion value so that the security will trade much like a straight security. A common stock equivalent refers to the situation where the conversion value is considerably higher than the straight value so that the convertible security trades as if it were an equity instrument. A hybrid equivalent refers to the situation where the convertible security trades with characteristics of both a fixed income security and a common stock instrument.
Convertible Securities
While the downside risk of a convertible security usually is estimated by calculating the premium over straight value, the limitation of this measure is that the straight value (the floor) changes as interest rates change. An advantage of buying the convertible rather than the common stock is the reduction in downside risk. The disadvantage of a convertible relative to the straight purchase of the common stock is the upside potential give-up because a premium per share must be paid.
Convertible Securities
An option-based valuation model is a more appropriate approach to value convertible securities than the traditional approach because it can handle multiple embedded options. There are various option-based valuation models: one-factor and multiple-factor models. The most common convertible bond valuation model is the one-factor model in which the one factor is the stock price movement.