Consider a callable bond issued by Stahl productions and putable bond issued by Hearth Creations. Both bonds have option adjusted spread of 125 bps. Which of the following statements about the bonds (from the issuers perspective) could be accurate? A. The z spread for Hearth’s bond is based on the differences in YTMs B. THe cost of the put option on Hearth bond is -10 bps C. The spread over the spot rates for a Treasury security similar to Stahl’s bond is 110 bps D. Given a nominal spread for Stahl bond of 130 bp, the option cost is 5 bp.
B) is the only correct option since the price of a put option is negative…
Why not D as zspread is approx equals to nominal spread so 130-25 = 5 bp option cost of callable bond.
Correct me if I am wrong but Z spread can be approximated equal to Nominal spread only if the term structure is flat !!!
got it… thanks… it was a simple question but i got into the trap