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Question of the Week – Fixed Income

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    • Avatar of exam_whizexam_whiz
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        • Undecided
        20 Oct 2017 at 8:02 pm
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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
      • Avatar of exam_whizexam_whiz
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          • Undecided
          24 Oct 2017 at 7:18 am
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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.

        • Avatar of nar_bsoanar_bsoa
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            23 Oct 2017 at 4:59 am
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            Can anyone explain this?

          • Avatar of jak5189jak5189
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              25 Jan 2018 at 6:54 pm
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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. 

            • Avatar of shannondailyshannondaily
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                • Undecided
                25 Jan 2018 at 6:47 pm
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                Boo! I got it wrong. :neutral_face: 

              • Avatar of nar_bsoanar_bsoa
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                  27 Oct 2017 at 4:39 am
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                  got it…thanks

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