" A callable bond has a zero OAS". a. Does it mean it is overvalued, undervalued or fairly valued. b. Why?
depends on the benchmark over which the spread is calculated. I was weak in that area my first readthrough so I skimmed the l1 coverage of zspread and OAS and I’ve been fine since
terrible question. if there is very little credit risk an OAS can be zero or even negative. i wouldnt be surprised if the CFAI says its overvalued since you arent being compensated blah blah blah but that really is a terrible question.
It can either be fairly valued or over valued depending on the benchmark used. If the OAS > OAS for benchmark > 0, it is undervalued - Long on this bond. It the OAS < OAS for benchmark or even if OAS <= 0, it is overvalued - Short this bond. Higher the value of OAS, higher will be the value in the denominator for calculating the price of the bond, as a result lower will be the value, so, if OAS for a bond is more than the OAS for the benchmark, it means the value of the bond is lesser than the value of the benchmark and it is undervalued and is expected to rise in future. So long this security. We can have a similar deduction for negative or < benchmark OAS, which are overvalued. However, this is how I understand the concept. Comments and suggestions are welcomed.
I would think its overvalued… since OAS = Z spread - Option cost and this means that the option cost here is equal to Z spread. Usually we want to buy callable bonds with large OAS and small option cost. But this also means that the credit risk and the liquidity risk do not exist in the bond. This is my understanding.
It is overvalued. Your paying the same amount as a Z-spread without any compensation for the risk for the option being assigned.
yeah definally overvalued
i second what deep2002 said.
fairly priced if the issuer-specific benchmark is used, overvalued if Treasuries or industry (typically better credit quality than the issuer) specific benchmarket are used.
yeah, you guysbarent taking into account the benchmark as maritkis, I and someone else above pointed out. OAS can be calculated as the spread over same issuer bond.
^^ I agree, without more information I would say this bond is fairly priced.
i remember that as for putable bond, OAS is less than zero, does it mean overvalued ?? i must miss something, need help pls
without complete information its pointless to answer the question imo. you read this and that and then get all confused your self…