1
$\begingroup$

Why do people use OIS and LIBOR swap spread to compare/value bonds/derivatives?

Why not just use US treasury?

$\endgroup$
1
$\begingroup$

Risk-free rate is used to discount future values to today; but we use this rate to denote cost of capital (loosely speaking) i.e., you can borrow/lend at this rate. US Treasuries would be used if the entity whose securities were being valued enjoyed the same credit as the government.

Since most banks can at best borrow at OIS/LIBOR; this becomes the rate of choice when valuing securities. As a side, if you wanted to value securities issued by a known bad credit, you would discount the future values more heavily using a rate higher than LIBOR/OIS.

$\endgroup$
0
$\begingroup$

In general, practitioners may run a combined book of Bonds and Interest Rate derivatives (Libor IRS, OIS etc.) In this case, in order to have an understanding of risk which includes all parts of the book in a systematic way, it makes sense to link the price of bonds to the LIBOR/OIS curves which underlie the valuation of interest rate derivatives.

Also there are some technical complexities when building a US treasury curve (or any bond curve for that matter) - individual bonds are driven by idiosyncratic factors (liquidity, specialness etc.) over and above the interest rate & credit default term structures. It can be difficult/impossible to isolate the different components that drive a bond's price and recover an idealised "pure" treasury-implied zero curve.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.