For
noncallable bonds modified duration and effective duration are the same.
The yields are comprised of
noncallable bonds 20 - 30 years in maturity.
Treasury bonds (or alternate benchmarks, such as
the noncallable bonds of some other borrower, or interest rate swaps) are generally not available with maturities exactly matching MBS cash flow payments, so interpolations are necessary to make the OAS calculation.
If so, you buy the longest
noncallable bonds, add keep buying every dip, until rates reach your expected nadir.
A callable bond is worth less to an investor than
a noncallable bond because the company issuing the bond has the power to redeem it and deprive the bondholder of the additional interest payments he'd be entitled to if the bond was held to maturity.
Not exact matches
What I am arguing is that choosing the narrow area of the
bond market that did best over the last 30 years — highest quality
noncallable long debt, is not a fair comparison against the stock market as a whole.
Like equity, which is a long duration asset, these
bonds in the index are
noncallable with 25 - 30 years of maturity.
If, during this period, a high - grade,
noncallable, long - term
bond with a 12 percent coupon had existed, it would have sold far above par.
Back when dividend yields were higher, and corporate
bond yields were higher, both absolute and relative yield managers flourished as interest rates and dividend yields crested in the early 1980s, and the stocks paying high dividends got bid up as interest rates fell, much as the same thing happened to zero coupon and other
noncallable long duration
bonds.
Now, when I was a
bond manager, because my client had a large amount of long
noncallable liabilities, I bought less liquid debts when I received adequate compensation to do so, but not more than my client's balance sheet could tolerate.
Yields on callable
bonds tend to be higher than yields on
noncallable, «bullet maturity»
bonds because the investor must be rewarded for taking the risk the issuer will call the
bond if interest rates decline, forcing the investor to reinvest the proceeds at lower yields.