In the 2009 mock afternoon session question 46, CFAI basically states that all else equal, an agency CMO with a lower option cost and lower OAS is more attractive. From my understanding of CMOs, if you are looking to go long, the higher the OAS, the cheaper the bond. Moreover, if you are going long, you are basically going short the option. Therefore, the higher the option cost, the better as you get a cheaper bond. I am confused by their answer and would appreciate any input. Thanks!
this is a great problem. Which part of their answer is confusing? PAC3 has 2nd highest OAS, lowest option cost, still has the highest OAS even at 10% volatility, and great % price change. Not sure if I can put it any better than that…let me know