CFA CFA Level 1 Question of the Week – Fixed Income

Question of the Week – Fixed Income

  • Author
    Posts
    • exam_whiz
      Participant
        • Undecided
        Up
        6
        ::

        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
      • exam_whiz
        Participant
          • Undecided
          Up
          8
          ::

          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.

        • Up
          5
          ::

          Can anyone explain this?

        • Up
          3
          ::

          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. 

        • shannondaily
          Participant
            • Undecided
            Up
            1
            ::

            Boo! I got it wrong. :neutral_face: 

          • Up
            0
            ::

            got it…thanks

        Viewing 5 reply threads
        • You must be logged in to reply to this topic.