OAS on a straight bond is estimated to be 48bps....which is most accurate?

CFA Level II
#1

1 - OAS on callable bond will be greater than 48 and OAS on CB will be less than 48

2 - OAS of the CV will be less than 48bps while the OAS of the putable bond will be greater

2 - OAS of all three will be the same.

I cannot understand the correct answer here!!! FREAKING NO CLUE!

I eliminated A, since the OAS for a callable bond will be less than the z-spread!!! OH GOD I HATE FIXED INCOME!

#2

would a putable bond have a greater OAS spread than a straight bond?

#3

The OAS is the spread _ when the option value is removed _; with the same underlying (straight, option-free) bond, the OAS should be the same.

#4

I can’t visualize it!

This is how I understand these concepts:

I will list the spread over the treasury yield curve ( starting with the nominal)

  1. NOMINAL
  2. Z-spread
  3. OAS
  4. Treasury yield

The nominal has option + Credit + Liquidity + option

Z = Credit + Liquidity + option

OAS = Credit + Liquity

If the spread is the difference between the z - spread - OAS = option cost

assuming a callable bond, Z-spread>OAS = option cost

assuming a putable bond, z-spread

I see so a callable / putable /’ straight bond, will have difference option costs, but when the option is removed, they will all have the same spread over the treasury yield.???

#5

This statement, along with your post (about OAS) in another thread, helped me actually understand what I read about the OAS (it seems I was reading pretty absent-mindedly). Well, they do say reading is a passive activity…thanks!

#6

Yes.