Corporate spread durations affect the price response of a bond to economic conditions. Investors and issuers monitor this response to determine whether to exercise options or call bonds early. A 100 basis point change in corporate spreads over LIBOR is used to track the response.
Corporate spread durations have to do with the price response of a corporate bond to various economic conditions over the life of the bond. In this regard, he focuses on bond price sensitivity as it relates to factors such as changes in the market and changes in Treasury spreads as it relates to optioning the bond. Designing is one of the common tasks that many investors and brokers dealing with bond issues will investigate very closely before making a bond purchase.
A corporate spread, as it relates to a security, affects the amount of cash flow that can be received by the investor holding the security option. Depending on changes in various factors, investors may need to rethink whether and how they will exercise their options on corporate bonds. If the duration of the corporate spread indicates that market price changes merit the share, the investor may choose to execute the bond issue, if that is an option with the bond structure.
Bond issuers also watch this response as it can affect whether the bond can reach maturity or whether the bond must be called at an earlier time allowed by the terms and conditions associated with the bond. For example, if the duration of the corporate spread is such that conditions cause the bond price to rise significantly, the issuing company may choose to call the bonds early, pay them off, and create a new bond issue. If it indicates that the bond’s price is rising in line with projections and there are no major changes in the market, however, the bond is likely to remain intact until the point of maturity.
Tracking this response is based on using a 100 basis point change in corporate spreads over LIBOR. If all factors remain more or less within projections, bondholders and issuers will typically not feel the need to take any action and the bond will continue to progress towards maturity. A spread over LIBOR that indicates climate-altering economic changes and alters basic market performance assumptions related to bond issuance, however, may indicate the need for action sooner rather than later.
Asset Smart.
Protect your devices with Threat Protection by NordVPN
