Introduction to Option-Adjusted Spread Analysis: Revised and Expanded Third Edition of the OAS Classic by Tom Windas

CHAPTER 10

NONBULLET BONDS

THE VSB BULLET BOND introduced in Chapter 9 is an example of a fixed-income security whose cash flows are independent of the level of interest rates. In other words, no matter how interest rates change or what values they assume, the VSB bullet bond’s future payment stream remains intact and unaffected. In contrast, a large class of fixed-coupon nonbullet bonds have payment streams that are dependent on the level of interest rates. For this group of securities, the actual payments made are determined in some way by the interest rates prevailing at a particular point in time. Nonbullet bonds of this type contain one or more provisions for the early return of principal. As discussed earlier, these provisions are referred ...