Which of the following statements regarding yield spreads is INCORRECT? The: A. Option value in percentage terms can be computed by subtracting the OAS from the zero-volatility spread. B. Static spread measures the yield spread over Treasuries after adjustments are made for the shape of the yield curve. C. Nominal yield spread measures the difference between the YTM on a risky bond, the YTM on a Treasury bond of similar maturity, and the yield on a risky bond. D. Static spread is the constant spread that is added to each Treasury spot rate to equate the present value of future bond cash flows to the price of a similar option-free bond.

Ill go with A…

A too. Zero or Static spread doesn’t take into account of embedded options and hence it’s inferior to OAS in terms of usefulness.

I think D is incorrect

It’s D. Static spread is the constant spread that is added to each Treasury spot rate to equate the present value of future bond cash flows to the price of a similar option-EMBEDDED bond

B

d

>C. Nominal yield spread measures the difference between the YTM on a risky bond, the YTM on a Treasury bond of similar maturity, and the yield on a risky bond. What does this mean? we have 3 things here: 1. YTM risky bond 2. YTM Treasury bond 3. yield on risky bond Apart from the fact that “the difference” between 3 things is not a number, the nominal spread is the difference between 1 and 2 (in the US). So simply on a grammatical basis, I’d say C.

Haha…chrismaths… That’s exactly how I looked at it too. C appears to be the one that makes the least sense.

Haha me too. I just thought that was a silly reason for choosing the answer.

So, what’s the answer finance03?

B.

C for me

definitely C: 1) A is correct 2) B talks about the z-spread which consider the adjustments of the yield cure (spot-rate curve) 3) what they actually say is that nominal spread = YTM(bond) - YTM(treasury) - “yield on a risky bond” [the last one is redundant] 4) Z-spread again; consider option-free bond Though you all guys might know it cold already - just a quick repetition

Answer is D my friends. its option EMBEDDED

+1 for me woohoo

Cant we add static spread to get the PV of option free bonds?

ancientmtk Wrote: ------------------------------------------------------- > Answer is D my friends. its option EMBEDDED BS. Static spread is a perfectly fine way to give the spread of an option-free bond. You can also compute it for a bond with embedded options which doesn’t make d false, just awkward. C is even more awkward since there seems to be some grammar error in it.

Yes I agree with JOey, I think z spread can be used to evaluate any kind of a non tresury bond. Am I right

Absolutely. Think you just have to use nominal spread for an option-free bond?! The z-spread and the nominal spread are different and z-spread is a better measure.