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标题: Reading 65: Yield Measures, Spot Rates, and Forward Rates LO [打印本页]
作者: honeycfa    时间: 2010-4-25 19:39     标题: [2010]Session 16-Reading 65: Yield Measures, Spot Rates, and Forward Rates LO

LOS g: Describe how the option-adjusted spread accounts for the option cost in a bond with an embedded option.

Kwagmyre Investments, Ltd., hold two bonds: a callable bond issued by Mudd Manufacturing Inc. and a putable bond issued by Precarious Builders. Both bonds have option adjusted spreads (OAS) of 135 basis points (bp). Kevin Grisly, a junior analyst at the firm, makes the following statements (each statement is independent). Apparently, Grisly could benefit from a CFA review course, because the only statement that could be accurate is:

A)
 The spread over the spot rates for a Treasury security similar to Mudd's bond is 145 bp.
B)
 Given a nominal spread for Precarious Builders of 110 bp, the option cost is -25 bp.
C)
 The Z-spread for Mudd's bond is based on the YTM.


The “spread over the spot rates for a Treasury security similar to Mudd’s bond” refers to the Z-spread on the bond. For a callable bond, the OAS < Z-spread, so this could be a true statement because 135bp < 145 bp.

The other statements are false. The option cost is calculated using the OAS and the Z-spread, not the nominal spread. The static spread (or Z-spread) is the spread over each of the spot rates in a given Treasury term structure, not the spread over the Treasury’s YTM.

Following is a more detailed discussion:

The option-adjusted spread (OAS) is used when a bond has embedded options. The OAS can be thought of as the difference between the static or Z-spread and the option cost. For the exam, remember the following relationship between the static spread (Z-spread), the OAS, and the embedded option cost:

Z Spread - OAS = Option Cost in % terms

Remember the following option value relationships:

 
作者: honeycfa    时间: 2010-4-25 19:39

An analyst has gathered the following information:

Which of the following statements regarding spreads on bond A is TRUE?

A)
 The nominal spread is approximately 85 basis points.
B)
 The nominal spread is approximately 25 basis points.
C)
 The Z-spread is approximately 85 basis points.


The nominal spread is 8.50% ? 7.65% = 0.85%. Note that the Z-spread, calculated by trial and error, is approximately 48 basis points.

作者: honeycfa    时间: 2010-4-25 19:41

Which of the following statements on spreads is FALSE?

A)
 The Z-spread will equal the nominal spread if the term structure of interest rates is flat.
B)
 The option-adjusted spread (OAS) is the difference between the Z-spread and the option cost.
C)
 The Z-spread may be used for bonds that contain call options.


The Z-spread is used for risky bonds that do NOT contain call options in an attempt to improve on the shortcomings of the nominal spread. The other statements are correct.

作者: honeycfa    时间: 2010-4-25 19:41

The following information is available for two bonds:

The embedded option cost for Bond:

A)
 X is 13bp.
B)
 X is 5bp.
C)
 X is 8bp.


Option cost (Bond X) = Z-spread – OAS = 68bp – 55bp = 13bp
Option cost (Bond Y) = Z-spread – OAS = 78bp – 100bp = - 22bp





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