Answer-first summary for fast verification
Answer: The option-adjusted spread is equal to the z-spread.
The correct answer to the question is A. The option-adjusted spread (OAS) is a measure that accounts for embedded options within a bond. However, if the bond contains no options, as is the case with the A-rated bond in question, the OAS is identical to the z-spread. The z-spread is the spread that must be added to the benchmark spot curve to arrive at the market price of the bond. Since the bond is trading at a price of USD 96.00, which is below par, and given the constant swap curve close to the spot rate of 2.5%, a positive z-spread is required to discount the bond's cash flows to match its market price. The i-spread, mentioned in option C, is not described in the provided content, but it generally refers to the interpolated spread over the swap curve rather than the spot curve. Option D is incorrect because the asset swap spread is related to the floating leg of an asset swap and is not directly comparable to the yield on a Treasury note.
Author: LeetQuiz Editorial Team
Ultimate access to all questions.
No comments yet.
A junior risk analyst who has recently joined the fixed-income trading team at a bank is tasked with understanding different methods for representing the credit spreads of fixed-income securities. The analyst is evaluating an existing position in a corporate bullet bond, which has the following characteristics:
Given that the spot curve is flat at 2.5%, which of the following statements about the spreads of the A- rated bond would be accurate for the analyst to conclude?
A
The option-adjusted spread is equal to the z-spread.
B
The z-spread is zero.
C
The i-spread is the spread that must be added to the benchmark spot curve to arrive at the market price of the bond rated A-.
D
The asset swap spread is the difference between the yield to maturity of the bond rated A- and the yield on the nearest-maturity on-the-run Treasury note.