nED IS considering the purchase of a newly issued asset backed security for his firxed income portfolio. OAS for this issue is 75 bps. Based on this, what assumptions can Ned make about this issue? C the bond is trading at a yield that is more than 75bps higher than a Treasury security with a comparable maturity D The implied cost of an option embedded in the security is always equal to the difference between the OAS and the Z spread Schweser gives C but, I bet on D
up.
why? For an ABS I would guess you sell an option, so the yield should be higher than if there were no option. So z-spread > OAS, and option ~ z-spread-OAS. the only thing in C that might be unclear is how the z-spread compares to the yield-spread, right? But otherwise spread incl. option > OAS = 75bp.