CFA Practice Question
Which of the following is most likely incorrect?
A. Option Cost for a bond is the Z-spread minus the OAS (at the assumed interest rate and yield volatility).
B. A bond has a theoretical price (calculated using a binomial tree model) of $102, and a market value of $101. The OAS (for the binomial tree model) for the bond is negative.
C. The Z-spread measures the spread over the entire Treasury spot- rate curve that the investor would receive if the bond was held to maturity.
Explanation: It should be positive. OAS is defined at the spread which explains the amount by which the theoretical price exceeds the market price.
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