Corporate Bond Yield

actuaryalfred · August 16th, 2007, 3:14 am

Is it okay to use Hull-White or Vasicek model directly on the corporate bond yield (that means do the calibration using corporate bonds) instead of breaking it down to treasury bond yield + (credit) spread?

actuaryalfred · September 6th, 2007, 2:35 am

Anyone? Either appropriate or not. Even a short answer could be very helpful. Thanks!

daveangel · September 6th, 2007, 11:44 am

what you trying to do with Hull-White or Vasicek ? Are you pricing options on corporate spreads ?

actuaryalfred · September 6th, 2007, 2:29 pm

I want to do something called horizon pricing --- to price something (in particular the same class of corporate bonds) in some future dates.

daveangel · September 6th, 2007, 5:34 pm

i dont think Hull or Vasicek is what you want ...

actuaryalfred · September 6th, 2007, 8:17 pm

then what would you suggest?

daveangel · September 7th, 2007, 8:20 am

this is not really my field - but i am guessing you want to price some corporate bonds at some point in the future given some level of rates or yields ?

Guest · September 7th, 2007, 12:09 pm

I suppose you ought to separate riskless rate and credit spread. There's also a liquidity prepium priced in yield, which can sometimes be substantial (although it's much lesser than first two components). Maybe you should try to model these things separately and then get to a yield value?

actuaryalfred · September 7th, 2007, 2:44 pm

QuoteOriginally posted by: daveangelthis is not really my field - but i am guessing you want to price some corporate bonds at some point in the future given some level of rates or yields ?Yes, in particular I want to know how much one the company can raise by issuing the coroprate bonds. So what I wanted to do is to use the corporate bond yield evolved to the future to price the cash flow stream. Does that make sense?

actuaryalfred · September 7th, 2007, 2:46 pm

QuoteOriginally posted by: GuestI suppose you ought to separate riskless rate and credit spread. There's also a liquidity prepium priced in yield, which can sometimes be substantial (although it's much lesser than first two components). Maybe you should try to model these things separately and then get to a yield value?Yes, the spread can include many things other than the credit spread and that's why I don't want to separate them and embed them all in the interest rate model and assume the whole thing will evolve according to some interest rate models.