Credit Bond Valuation, Spread Measures, and Curve Construction

Summary

The document asks how practitioners value and mark credit-risky bonds, from corporate debt to structured products. It sketches fixed-rate bond valuation using a government yield curve plus a credit spread, and floating-rate bond valuation using a reference curve plus a spread. It also asks whether these spread descriptions correspond to option-adjusted spread, and notes that mortgage-backed or asset-backed instruments require modeling cash flows and prepayments.

A second question distinguishes curve construction from interest-rate modeling. Interpolation or parametric approaches, such as Nelson–Siegel–Svensson and piecewise curves, can fit observed market data to produce discount or forward curves. Models such as Hull–White, HJM, or LMM instead describe the evolution of rates and can support pricing instruments whose values depend on future rate paths. The document is a set of questions rather than a worked valuation: it gives no market data, calibration, or specific answers. Credit spreads, OAS, and prepayment assumptions require instrument-specific conventions and models.

Key ideas

• Corporate bond valuation commonly combines a base yield curve with compensation for credit risk.
• Floating-rate debt references a benchmark curve and adds a credit spread.
• Structured products may require cash-flow models that represent prepayment behavior.
• Curve fitting methods construct curves from market observations, while rate models describe possible future rate dynamics.
• The document raises, but does not settle, how quoted credit spreads relate to option-adjusted spread.

Tags

# Term structure building for credit risky bonds


# Term structure building for credit risky bonds












I am trying to understand how, in practice, bonds (from simple corporate bonds to structured products like CDOs, ABS, MBS, etc.) are valued and marked to market.

-For corporate bonds,

```
 - fixed-coupon bonds: Treasury curve (yield curve) + credit spread 
   (product of the probability of default and recovery rate derived 
   from comparable bonds or CDS)

- floating rate bonds: reference yield curve (like LIBOR+swap 
  curve) + credit spread.
```

Is this equivalent to the OAS spread?

-For structured products like MBS, model underlying cash flows, prepayments, and the speed of prepayment?

However, I have read about term structure models like Hull-White, HJM, LMM used to build term structure. To value bonds would we use those models, or some interpolation models like Nelson Siegel Svensson, polynomial/piecewise for curve construction?

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.