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I am wondering what metric is better at incorporating credit risk, is that OAS or effective yield for the floater coupon bonds? What intuition each of them carries out? When would I use or the other for estimating the volatility?

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You can calculate the yield of a floater and compare to a yield of a benchmark. However a floater's yield will change whenever the projection curve moves.

Spread measures like discount margin (DM) or OAS or Z-spread (if non-callable) seem like a more intuitive way of comparing credit risk to other bonds.

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  • $\begingroup$ projection curve would affect the benchmark as well. How in this case yield of a floater is different from the yield of the fixed? The former depends on the forward curve while the latter doesn't? $\endgroup$
    – Medan
    Mar 17 at 15:23
  • $\begingroup$ does yield also have a credit component or is that a more complex measure that combines rates and credit while OAS is more credit related? When people quote spread for the floater, does it reflect credit or rates and credit view? I am thinking what measure: yield vs OAS correlates more with the spread? $\endgroup$
    – Medan
    Mar 17 at 15:25
  • $\begingroup$ yield relates the price you'd put on a trade ticket to the promised cash flows, which, for a floater, depend on its coupon projection curve. Ultimately, the price reflects discount for perceived credit risk, liquidity, taxes, etc. For quoting (runs, screens, etc) yield is inconvenient for floaters because their yield changes whenever the projection curve changes. Usually people quote DM or just quote price for floaters. OAS also considers volatility (of interest rates) that affects callable bond. Can you explain in more detail what you're trying to do please? $\endgroup$ Mar 17 at 16:08

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