Course Name: Natural Language Processing in Trading, Section No: 6, Unit No: 4, Unit type: Notebook
Q1: The bond PNL formula is used to compute bond returns. why we dont directly take the returns of the mid bond price? Do you want to show how to predict bond pnl from the duration?
Q2: in the pnl formula, you divide the changes in OAS by 100. Why is that? To convert the difference in 'natural' units you need to divide by 10000, no?
Hello,
The returns of the mid bond price will not be a good approximation for computing bond returns. Also duration is a key metric in bond pricing and including it in the calculation gives us a more holistic view of the bond returns.
With respect to the second question, change in OAS is given in basis points, and dividing by 100 converts the basis points to a percentage change.
This percentage change is then multiplied by the duration to get the price change in percentage terms.
Therefore, if the OAS change is in basis points, dividing by 100 is correct. If the OAS change were already in natural units (percentage points), you would use that directly without additional conversion.
Hope this helps.