I don’t get the solution to prob# 10 on page 160. Book 5 (2008) If Z spread is greater than OAs then shudnt the embedded option be a call? The solution goes on to explain its a put I don’t get it Really sorry for not typing the whole problem, I’m on my blackberry.
hmm there seems to be some discrepancies between the learning material and the answer. In the text (p.119) “The option adjusted spread (OAS) measure is used when a bond has embedded options. A callable bond, for example, MUST have a greater yield than an identical option free bond, and a greater nominal spread of Z-spread.” So in this case, if Bond A has a Z spread of 1.4, and an OAS of 1.2, that means that if the investor with a this normal bond were to put an embedded option they would require higher spreads (for taking higher risk). Higher risk in this case is the chance of the issuer calling the bond early, hence it should be an embedded call. I would suggest re-reading pages 119-120 and ignore the explanation in the answer page and move on.
Yea. That was plan B Good luck