SCHWESER BOOK 6 1. EXAM AM understand, interest, someone, market, price

iteracom

QUESTION 46
how do we know that the OAS of the callable bond is postive? It says that the model price of the callable bond is greater than the market price. Hence a postive spread must be added to very interest rate in the lattice…When a constant spread is added to all the rates, such that the model price is equal the market price, you have found the OAS.
I don’t understand how they do this!can someone help?
thanks!

dontknow1987

The price the model generated was greater than the observed marker price, so we need to increase the discount rates byt adding a +ve spread, this higher discount rate, will lower the value generated by the lattice-model and hence they say that the OAS is +ve

thecfawannabe

thank you! man, im always looking at the solutions. too nervous too solve the whole exam. its terrible!!

genuinecfa

No worries; the world needs ditchdiggers, too.
Just kidding, you’ll be fine - just stick with it.