CFA Practice Question

There are 252 practice questions for this study session.

CFA Practice Question

Which of the following statements is (are) true with respect to various methods of calculating a yield spread?
A. Option adjusted spread considers both the impact of embedded options and the term structure of interest rates.
B. The yield spread attributable to the embedded option is the sum of the zero-volatility spread and the option adjusted spread.
C. As the volatility in interest rates increases, the option adjusted spread on a callable bond will become higher than its corresponding zero-volatility spread.
Explanation: B is incorrect because the yield spread attributable to the embedded option is the difference between the zero-volatility spread and the option adjusted spread.

C is incorrect because as the volatility in interest rates increases, the option adjusted spread on a callable bond will become lower than its corresponding zero-volatility spread.

User Contributed Comments 3

User Comment
danlan2 OAS does not consider impact of embedded options, so A is wrong?
ThePessimist OAS *does* consider impact of embedded options, so A is correct.
aggabad OAS considers the impact of options=> it eliminates option risk
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