BondOAS™ – Fixed Income Valuation

Description

BondOAS™ is a rigorously developed, thoroughly tested valuation engine for the universe of fixed coupon bonds and fixed dividend preferred stocks. These can be step-up coupons, callable, putable, amortizing, and pre-refunded securities. BondOAS™ uses a proprietary tetranomial lattice model employing the Black-Karasinski interest rate process and a recursive valuation procedure.

The library contains a suite of internally consistent analytical routines, the primary ones being arbitrage-free valuation, conventional price/yield calculation, and scenario analysis.

BondOAS™ runs on Windows and Solaris platforms. Its speed and accuracy makes it ideal for interactive applications or high volume batch processing. BondOAS™ has been widely implemented, primarily in trading, index calculation, and risk management systems. Its users include major investment banks along with global financial information services. 

Applications:

• Real-time pricing
• End-of-day-marking to market
• Risk management
• Index calculation
• Web-based services
• Trading systems

Distinguishing Features:

• Valuation of interrelated call, acceleration and delivery options on a sinking fund bond
• Call and put options optimally exercised during holding period in scenario analysis
• Numerical pitfalls avoided in lattice-based calculation of risk measures

Performance (2.0 GHz Pentium 4):

• Bond valuations per minute, using a single lattice:
  • Fair values given OAS: 45,000
  • OAS given price: 26,000
• Bond valuations per minute, using discount factors:
  • Fair values given OAS: 220,000
  • OAS given price: 130,000

Coverage

• US agency bonds
• US Treasury notes and bonds
• US corporate bonds
• US municipal bonds
• US fixed dividend preferred stocks
• Foreign sovereign bonds
• Foreign corporate bonds
• Foreign fixed dividend preferred stocks

Functionality

• Conventional bond calculation:
  • Price/yield (YTM, YTC, YTP, YTW, CFY) conversion for standard daycounts
  • Accrued interest for standard daycounts
  • Modified duration/convexity/DV01
  • Cashflows
• Valuation:
  • Option adjusted spread (OAS) corresponding to a price
  • Fair value given OAS
  • Effective duration/convexity/DV01
  • Key rate duration
• Scenario analysis and stress testing:
  • Total return over specified holding period and interest rate scenario
  • Scenario-dependent calls and puts
• Yield curve analysis:
  • Volatility term structure
  • Discount factors, zero coupon rates and forward rates corresponding to a par yield curve
• Spread analysis:
  • Z-spread: zero-volatility OAS
  • I-spread: difference between a bond’s YTM and maturity-matched interpolated yield on the given benchmark yield curve
  • G-spread: the I-spread, if benchmark yield curve is a government yield curve (e.g. U.S. Treasuries)

Methodology

• Industry standard Black-Karasinski lognormal short rate model with user-specified short-term interest rate volatility and mean reversion
• Built with AKA's lightning fast proprietary implementation of an arbitrage-free multinomial lognormal interest rate model

Technical Specifications

• Platforms: Windows, Linux, Solaris, Mac OS X
• Written in C
• Multi-thread safe
• Distributions:
  • DLL: Windows
  • Libraries: Windows, Linux, and Solaris
  • Executables: Windows, Linux, and Solaris
• Easily integrated with Java, C++, Visual Basic, and web applications
• Documented API

Supporting Documents

• The Problem with Black, Scholes et al.
  Derivatives Strategy (November 1995)

• The Perils of Monte Carlo
  Derivatives Strategy (June 1994)

• A Model for Valuing Bonds and Embedded Options
  Financial Analysts Journal (May/June 1993)