- CFA Exams
- CFA Level I Exam
- Study Session 13. Fixed Income (2)
- Reading 34. Valuation and Analysis of Bonds with Embedded Options
- Subject 4. Option-Adjusted Spread

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**CFA Practice Question**

Which of the following statements is true with respect to bonds with embedded options?

A. A bond with an embedded put option will trade at a higher yield to maturity than a comparable bond without the embedded put.

B. The option-adjusted-spread on a callable bond will always be higher than its nominal spread.

C. The option-adjusted-spread is the average spread the investor would actually earn over a comparable Treasury.

**Explanation:**B is incorrect because a bond with an embedded put option will trade at a lower yield to maturity since the bond would have a higher price.

C is incorrect because the option-adjusted-spread on a callable bond will always be lower than its nominal spread. Therefore, the option-adjusted-spread is the average spread the investor would actually earn over a comparable Treasury.

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**User Contributed Comments**
2

User |
Comment |
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tim2 |
D is incorrect also. I think - the OAS is the spread the average investor would earn if there were no option. |

yxten1 |
Treasury has no option, hence OAS is the avg spread investor will earn |