This sentence confused the hell out of me…can somebody clarify it plz? Schweser Notes, book 5, page 98, LOS55.g summary paragraph: “…any corporate bond with an OAS less than or equal to 0 is overvalued relative to the benchmark, because it must have more credit risk, and most likely more liquidity risk, than the benchmark.” Let’s say the OAS = 0, doesn’t it mean that the Z-spread is simply the option cost? Then wouldn’t it mean that it has equivalent credit risk and liquidity risk to those of the benchmark? then how come it is overvalued and how come it “must have more credit risk…”?
My understanding is that if a bond had an OAS spread of zero, then if you had an identical bond but without the option, it would trade at the same yield as a comparable term treasury (zero Z spread).