Z-Spread Question

This is taken from one of the self-test questions in the Schweser study notes. Bond A has an embedded option, a nominal yield spread to Treasuries of 1.6%, a zero-volatility spread of 1.4%, and an option-adjusted spread of 1.2%. Bond B is identical to Bond A except that it does not have the embedded option, has a nominal yield spread to Treasuries of 1.4%, a zero-volatility spread of 1.3% and an option-adjusted spread of 1.3%. The most likely option embedded in Bond A, and the bond that is better value, are: Embedded Option Better value A Put Bond A B Put Bond B C Call Bond A D Call Bond B The answer is B. I’m totally lost on this, I thought that if the Zpread > OAS than there’s a call option. The explanation in the book confuses me even more… help?


z spread = oas + option cost (in case of call, spread will be higher for call) z spread = oas - option cost (in case of put) and B bond is greater value because OAS is greater for B than for A. so D is the answer?

This was post a while back, schweser has that listed as an error and the answer should be D always remember “The Z-spread - OAS = option cost in percent For callable bonds: Z-spread > OAS and option cost > 0 For putable bonds: Z-spread < OAS and option cost < 0”

Got another one for ya: ned jameson cfa is considering the purchase of a newly issued ABS for his fixed income portfolio. According to his broker/dealer offering the bond, the OAS for the issue is 75 bps. based on a OAS value, which of the following assumptions can jameson make about this particular ABS? a. The bond is trading at a yield that is more than 75 bps higher than a treasury security with a comparable maturity. b. the impllied cost of an option embedded in the security is always equal to the difference between the OAS and Z spread. The other two answers are obivously not correct. So what do you lot think and why?

Thank god, I was about to throw my book out the window lol. I’m not as doomed as i thought. Thanks for the replies

A, i’d say.

why not B. A is correct however I put B