Consider a 10-year U.S. government agency bond that is callable after 3 years and has an 8.25% YTM. This bond is priced at a yield of 120 basis points over 10-year on-the-run U.S. treasuries. All of the following statements are true EXCEPT: a. the OAS of this bond is less than 120 basis points. b. if the agency bond were callable after 5 years, the nominal spread would greater than 120 basis point. c. if the agency bond were noncallable, the nominal spread would be less than 120 basis points. d. if the agency bond were callable after 5 years, the OAS would be less than 120 basis points.

B

Whats the ans for ths one

yes. the ans is B. could you explain the logic?

You as an investor would require less of call premium because it is not callable until the 5th year rather than the 3rd.

Usually the yield spread of a bond reduces as it comes close to maturity since the prepayment risk reduces. As a result of this the spread should fall below 120 basis. Another thing is price risk which decreases as a bond comes closer to maturity.

>Smeet Wrote:; >Usually the yield spread of a bond reduces as it comes close to maturity since the prepayment >risk reduces. As a result of this the spread should fall below 120 basis. If a bond is sold at premium, the yield spread of the bond rises as the bond approaches maturity. In this question, since the time value of the option is decreased, the price of the callable bond increases. So, the yield should decrease.