- This topic has 5 replies, 4 voices, and was last updated Jan-186:54 pm by
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Up6
Which of the following statements relating to Z-spread, Option-adjusted spread (OAS) and option cost for callable and putable bonds is/are most likely correct?
I: For callable bonds, Z-spread is greater than OAS and option cost is greater than 0
II: For callable bonds, Z-spread is less than OAS and option cost is greater than 0
III: For putable bonds, Z-spread is less than OAS and option cost is greater than 0- All three statements are correct
- Only statement II is correct
- Only statement I is correct
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Up8
Correct Answer: C
For callable bonds, Z-spread is greater than OAS and option cost is greater than 0. For putable bonds, Z-spread is less than OAS and option cost is less than 0. Only statement I is correct.
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Up5
Can anyone explain this?
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Up3
For a Putable bond, the yield will be smaller as investors will value it more; so when you take away the put the OAS will have to be larger than the z-spread. For a Callable bond, the yield will be larger as investors will not value it more; so when you take away the Call the z-spread will be larger than the OAS. Hopefully that helps conceptualize the reasoning behind the spread differences.
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Up1
Boo! I got it wrong. :neutral_face:
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Up0
got it…thanks
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