CFA Practice Question

There are 252 practice questions for this study session.

CFA Practice Question

Given the following interest rate tree, the value of a 2-year, 6% coupon, callable bond (in one year at 100) should be 101.92. However, the market price is actually 101.21. What is the OAS?

A. -25 bp
B. 50 bp
C. 100 bp
Correct Answer: B

Let's add 50 bp to each of the 1 year rates in the tree and re-calculate the value of the bond.

If the spread of 50 bp is added to each of the 1-year rates in the tree, the value of this bond will equal its market price of 101.211.

OAS: the spread added to each node that makes the calculated value equal to the market value (Know this!!!)

User Contributed Comments 5

User Comment
kodali Can be found only by trial and error
vi2009 OAS is the "plug" that makes the bond = the market price ...
REITboy What am I doing wrong here?

Upper: $105.755/1.043796=$101.318
Lower: $106/1.043796=$101.552
Avg: $101.435
arudkov 2 REITboy - got the same result.
NIKKIZ Upper:106/1.0676=99.288 Lower:106/1.0514=100.82 (callable at 100)

[{(99.288+100)/2}+6]/1.0438=101.21

I added 50 basis points to the discount rates given.
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