1．An analyst has constructed an interest rate tree for an on-the-run Treasury security. Given equal maturity and coupon, which of the following would have the highest option-adjusted spread?

A)   A putable corporate bond with a AAA rating.

B)   A callable corporate bond with a Baa rating.

C)   A putable corporate bond with a Aaa rating.

D)   A callable corporate bond with a Aaa rating.

2．Which kind of risk remains if the option-adjusted spread is deducted from the nominal spread?

A)   credit risk.

B)   liquidity risk.

C)   volatility risk.

D)   option risk.

3．Which part of the nominal spread does the option-adjusted spread (OAS) capture?

A)   option risk.

B)   credit and liquidity risk.

C)   liquidity and option risk.

D)   interest rate and volatility risk.

1．An analyst has constructed an interest rate tree for an on-the-run Treasury security. Given equal maturity and coupon, which of the following would have the highest option-adjusted spread?

A)   A putable corporate bond with a AAA rating.

B)   A callable corporate bond with a Baa rating.

C)   A putable corporate bond with a Aaa rating.

D)   A callable corporate bond with a Aaa rating.

The correct answer was B)

The bond with the lowest price will have the highest option-adjusted spread. All other things equal, the callable bond with the lowest rating will have the lowest price.

2．Which kind of risk remains if the option-adjusted spread is deducted from the nominal spread?

A)   credit risk.

B)   liquidity risk.

C)   volatility risk.

D)   option risk.

The correct answer was D)

The OAS captures the amount of credit risk and liquidity risk.

3．Which part of the nominal spread does the option-adjusted spread (OAS) capture?

A)   option risk.

B)   credit and liquidity risk.

C)   liquidity and option risk.

D)   interest rate and volatility risk.

The correct answer was B)

The OAS removes the amount that is due to option risk from the nominal spread leaving just the credit and liquidity risk.