The trick question is from Schweser Practice Exams , Volume 1, Test 1, Morning Session, Question 46. Could somebody explain me why is the OAS positive? And what’s whith that lattice? What does it represent? Thank you.
The OAS has to be positive because the question tells you that Rogers calculates a price that is above the market price - in order to bring the calculated theoretical price down to the market (fair) price, the “discount” rate needs to be higher, hence the OAS needs to be positive. The “lattice” is just the interest rate tree on the previous page…