- 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
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 |