Statement 1: The proper spread measure for option-free corporate bonds is the nominal spread. Statement 2: Callable corporate bonds and MBS should be measured using OAS. Statement 3: The Z-spread is appropriate for credit card ABS and auto loan ABS. Answer: B Only one statement is correct. I thought statement 2 and 3 are correct. But statement 2 is incorrect as it should have included option removed spread. I can't find option removed spread in my notes. Please help. Thanks!

hi @Reena and @Alta12 so yea only statement that is correct is statement 3 for the following reasons. It seems you both agree that statement 1 is incorrect so I won't explain that one. Statement 2 Statement 2: Callable corporate bonds and MBS should be measured using OAS. is correct but the actual question says Callable corporate bonds and mortgage-backed securities should be measured using the option-added spread which doesn't mean anything because that isn't a methodology. Hope that helps @Alta12

That's odd @Alta12 - I'm with you that 2 and 3 seems correct. Never heard of option removed spread! Is that the reasoning for the answer Schweser gave?

A CFA Level 2 Discussion About Derivatives

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This topic has 4 replies, 3 voices, and was last updated Apr-1711:26 pm by Alta12.

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- Alta12
  Participant
  14 Apr 2017 at 12:39 pm
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  Statement 1: The proper spread measure for option-free corporate bonds is the nominal spread.
  Statement 2: Callable corporate bonds and MBS should be measured using OAS.
  Statement 3: The Z-spread is appropriate for credit card ABS and auto loan ABS.
  
  Answer: B Only one statement is correct.
  
  I thought statement 2 and 3 are correct. But statement 2 is incorrect as it should have included option removed spread.
  
  I can’t find option removed spread in my notes. Please help. Thanks!
- Sarah
  Participant
  14 Apr 2017 at 9:43 pm
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  hi @Reena and @Alta12
  so yea only statement that is correct is statement 3 for the following reasons.
  
  It seems you both agree that statement 1 is incorrect so I won’t explain that one.
  
  Statement 2 Statement 2: Callable corporate bonds and MBS should be measured using OAS. is correct but the actual question says Callable corporate bonds and mortgage-backed securities should be measured using the option-added spread which doesn’t mean anything because that isn’t a methodology.
  
  Hope that helps @Alta12
- Reena
  Participant
  - CFA Charterholder
  14 Apr 2017 at 2:59 pm
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  That’s odd @Alta12 – I’m with you that 2 and 3 seems correct. Never heard of option removed spread! Is that the reasoning for the answer Schweser gave?
- Alta12
  Participant
  14 Apr 2017 at 3:03 pm
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  @Reena no reasoning provided by Schweser. They referenced it to Study Session 14 LOS 47 i. But I couldn’t find it there.
  
  I’m glad you think it seems odd too!
- Alta12
  Participant
  14 Apr 2017 at 11:26 pm
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  @Diya Got it! Thanks! I should read the question more carefully.
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