Bond A has an embedded option, a nominal yield spread to Treasuries of 1.6%, a zero-volatility spread of 1.4% and an OAS of 1.2%. The most likely option embedded in Bond A is: A) call B) put
call
A Call Z (1.4) - OAS (1.2) = + .2, must be a call.
Since the option is positive I would say A…
Exactly!!! I found that in Schweser self-test - Book 5 p160 question 10 - it says “put”
its explanation says “since the OAS is less than Z spread for Bond A, the effect of the embedded option is to decrease the required yield, so it must be a put option not a call option”
Nope, if Z spread > OAS, you got a call.
That’s incorrect: Z-Spread - OAS = option cost
> That’s incorrect: Z-Spread - OAS = option cost so if Z spread > OAS, doesn’t that tell you it’s a call?
Also if the nominal yield spread to Treasuries (1.6%) > zero-volatility spread of (1.4%), you automatically have a call. Can someone confirm?
Dreary Wrote: ------------------------------------------------------- > Also if the nominal yield spread to Treasuries > (1.6%) > zero-volatility spread of (1.4%), you > automatically have a call. Can someone confirm? I’m with you Dreary. for a call: Z-spread>OAS for a put: Z-spread
thanks a million that one was driving me into a tizzy