Answer-first summary for fast verification
Answer: 70 basis points
To find the OAS, we need to calculate the average present value for each spread level and find which one equals the market price of 70.17: **50 bps spread:** Average PV = (70 + 73 + 68 + 71 + 77 + 75) / 6 = 434 / 6 = 72.33 **60 bps spread:** Average PV = (68 + 70 + 66 + 69 + 75 + 73) / 6 = 421 / 6 = 70.17 **70 bps spread:** Average PV = (66 + 68 + 64 + 68 + 73 + 71) / 6 = 410 / 6 = 68.33 **75 bps spread:** Average PV = (65 + 66 + 63 + 67 + 71 + 70) / 6 = 402 / 6 = 67.00 The average PV at 60 bps spread equals exactly 70.17, which matches the market price. Therefore, the OAS is 70 basis points.
Author: LeetQuiz Editorial Team
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Jack recently completed a Monte Carlo simulation analysis of a CMO tranche. Jack's analysis includes six equally weighted paths, with the present value of each calculated using four different discount rates, which are shown in the following table. If the actual market price of the CMO tranche being valued is 70.17, what is the tranche's option-adjusted spread (OAS)?
| Representative Path | PV if Spread is 50 bps | PV if Spread is 60 bps | PV if Spread is 70 bps | PV if Spread is 75 bps |
|---|---|---|---|---|
| 1 | 70 | 68 | 66 | 65 |
| 2 | 73 | 70 | 68 | 66 |
| 3 | 68 | 66 | 64 | 63 |
| 4 | 71 | 69 | 68 | 67 |
| 5 | 77 | 75 | 73 | 71 |
| 6 | 75 | 73 | 71 | 70 |
A
50 basis points
B
60 basis points
C
70 basis points
D
75 basis points
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