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**CFA Practice Question**

You have applied your favorite valuation model to a bond with an embedded option and found an option-adjusted spread (OAS) of 40 basis points, while the Z-spread has been calculated at 207 basis points. What is the option cost?

B. 185 basis points

C. 207 basis points

A. 167 basis points

B. 185 basis points

C. 207 basis points

Correct Answer: A

207 - 40 = 167

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**User Contributed Comments**
4

User |
Comment |
---|---|

olagbami |
option cost: z spread-OAS |

bodduna |
Z spread = OAS + Option Cost |

CJPerugini |
If OAS < Zspread, then Call Option If OAS > Zspread, then Put Option |

tomalot |
My favorite bond valuation model...how can I choose just one!? |