CFA CFA Level 1 Question of the Week – Fixed Income

Question of the Week – Fixed Income

  • This topic has 5 replies, 4 voices, and was last updated Jan-18 by jak5189.
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    • exam_whiz
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      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
    • nar_bsoa
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      Can anyone explain this?

    • exam_whiz
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      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.

    • nar_bsoa
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      got it…thanks

    • shannondaily
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      Boo! I got it wrong. :neutral_face: 

    • jak5189
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      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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