In volume 5, reading 68, practice problem 37 on page 473, it asks the following: “The Z-Spread for a callable bond is 120 basis points (bp). The reported option-adjusted spread (OAS) of the bond is 70 bp. The option cost is approximately: a) 1.71429 bp b) 50 bp c) 70 bp D 190 bp” According to the back of the book, it says the answer is C, that “[t]he cost of the option is equal to the Z-spread minus the OAS.” Z spread is 120 OAS is 70 Option Cost should then be 50, not 70. Z = OAS + C C is positive on a callable bond. So Z is greater than OAS. Can someone please agree with me that the book is wrong and the answer should be “b”?
Looks like erratum to me.