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Discount margin to value risky floater

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    • Avatar of SbSSbS
      Participant
        20 Jan 2021 at 4:06 pm
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        We add discount margin to all nodes of binomial interest rate tree to arrive at market value of risky floater.

        Suppose we apply same analogy to fixed coupon bond and add constant spread to all nodes of binomial interest rate tree to arrive at market value of fixed coupon bond. Then in this case what would be the constant spread called?Is there any name to this spread?

      • Avatar of SbSSbS
        Participant
          21 Jan 2021 at 4:57 am
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          I calculated credit spread using CVA and added this across all nodes of Binomial interest rate tree. But this doesn’t reflect market price of risky bond.

          Credit spread is ideally calculated on comparable benchmark bond YTM. But we are adding spread to forward rates of binomial tree here.

          So I don’t believe it is credit spread.

        • Avatar of fp92fp92
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            • CFA Level 1
            21 Jan 2021 at 4:27 am
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            Credit spread. It contains many components priced in for, e.g. liquidity risk, default risk etc. I found this article quite interesting in detailing the study on it (https://blogs.cfainstitute.org/investor/2012/04/03/components-of-credit-spreads-and-their-importance/)

          • Avatar of fp92fp92
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              • CFA Level 1
              23 Jan 2021 at 7:10 am
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              I don’t follow what you’re on about, sorry.

              Do you have a question/example you’re working on?

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