I was doing a Schweser exam from the 2006 Book 6 (Volume 1) and came across a question on callable bonds. I don’t have my book with me right now, but in one of the answers it said that a callable bond has a positive OAS. Is this always true?
A callable Treasury bond wouldn’t have a positive OAS (maybe) but anything with liquidity or credit problems would.
I’m getting my book back in an hr… I’ll post the question then… from what I recall is that in order to make the callable bond arbitrage free we need to add a positive spread to on the run treasury yields… I’m getting confused now… gimme an hr or so and we’ll clear this up. F*CKING OAS!!! It’s been killing my brain like crazy today.