ISM versus OSM

[RustyShackleford]

I had to start a new thread, it said the old thread was too old ...

Has anyone recently run the calculation about a fair price differential between OSM and ISM ? I recall, a year or two ago, people seemed to think that OSM was worth about 40 cents more. I can't seem to reproduce that now - in fact, the moneychimp YTM calculator gives an error. You would think, with maturity sooner, that OSM's advantage would increase.

The market prices are very similar now ...

 

[RustyShackleford]

I suppose too, even if the YTM of OSM is technically higher - due to the shorter time to maturity to the same par value - that the the opportunity to keep earning inflation plus 2%, in today's interest rate environment, is worth a lot too.

 

[ERD50]

You can post to an old thread, that is just a warning, so that you are aware it may be 'stale'.

-ERD50

 

[youbet]

Recall that the current administration in Washington, early in the first term, expressed a desire to move student loans out of the private sector, likely to the detriment of SLM. This was interrupted by the recession and the urgency to work on that issue. It may turn out that before the second term is over, they're able to get back to that project.

That possibility makes it tempting to cash in my ISM and OSM here in the $24 range (my basis is in the mid-teens) and watch from the sidelines. I'd miss those nice monthly interest payments though. And SLM seems to be doing OK.

Tough to know what to do with it.

 

[FIRE'd@51]

Has anyone recently run the calculation about a fair price differential between OSM and ISM ? I recall, a year or two ago, people seemed to think that OSM was worth about 40 cents more. I can't seem to reproduce that now - in fact, the moneychimp YTM calculator gives an error. You would think, with maturity sooner, that OSM's advantage would increase.

According to my calculations (assuming 2% inflation), OSM should sell at a $0.13 premium to have the same real YTM. The reason the fair value of the spread has shrunk so much is because both bonds are trading at a much smaller discount to par, which reduces the advantage OSM has with its 10 month shorter time to maturity.

Think of it this way - if they were both trading at par (25) neither would have a discount to capture and ISM would have a 5 basis point higher YTM.

 

[RustyShackleford]

According to my calculations (assuming 2% inflation), OSM should sell at a $0.13 premium to have the same real YTM. The reason the fair value of the spread has shrunk so much is because both bonds are trading at a much smaller discount to par, which reduces the advantage OSM has with its 10 month shorter time to maturity.

Think of it this way - if they were both trading at par (25) neither would have a discount to capture and ISM would have a 5 basis point higher YTM.

Ok thanks. Yes, I was getting a much smaller number than the 40 cents awhile back, and your explanation makes sense.

I guess a price diff'al based solely on YTM does not capture things like risk of default or opportunity lost by not getting 2% real yield for another 10 months (with ISM versus with OSM).