hi, can anyone confirm that the answer provided by Schweser for the following problem is incorrect? has not been much response to this thread in L1 forum. thanks, John Bond A has an embedded option, a nominal yield spread to Treasuries of 1.6%, a zero-volatility spread of 1.4%, and an option-adjusted spread of 1.2%. Bond B is identical to Bond A except that it does not have the embedded option, has a nominal yield spread to Treasuries of 1.4%, a zero-volatility spread of 1.3% and an option-adjusted spread of 1.3%. The most likely option embedded in Bond A, and the bond that is the better value, are: Embedded option Better value A. Put Bond A B. Put Bond B C. Call Bond A D. Call Bond B Answer: B Since the OAS is less than the Z-spread for Bond A, the effect of the embedded option is to decrease the required yield, so it must be a put option and not a call option. The OAS is the spread after taking our the effect of the embedded option. Since the OAS is higher for Bond B, it represents the better value after adjusting for the value of the put in Bond A. I actually thought it was the other way around? In Reading #68 Shweser page 126 it says: The Z-spread - OAS = option cost in percent. • For callable bonds: Z-spread > OAS and option cost> O. • For putable bonds: Z-spread < OAS and option cost < O.
I would go with D here.
i’d go D as well. the lost letter D… oh how i’ve missed you so.