Fixed income _ question

CFA Level I Fixed Income
#1

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171415206939260029201169259400901920×1446 580 KB

I do not understand the answer ! Any help

#2

https://analystnotes.com/graph/bond/SS15SBlosc1.gif

#3

Could you explain by formulas, please ?

#4

OAS excludes anything to do with options.

Z-spread includes options.

Walmart have 3 bonds identifal in all respects except:

  • Bond X - no options at all
  • Bond Y - putable
  • Bond Z - callable

Bond X

  • Z-spread = 7%
  • No options
  • Z-spread = OAS= all return is due to credit and liquidity risk.

Bond Y

  • z-spread = 5%
  • Investor has beneifit of put option. Willing to accept lower return than option free bond
  • OAS = 7% same as bond X as credit and lquidity risk are the same
  • Option value = 2%
  • Investors willing to give up2% return pa for put option they own.

Bond Z

  • z-spread = 9%
  • Investor has risk of call option. Want higher return than option free bond.
  • OAS = 7% same as bond X as credit and lquidity risk are the same
  • Option value = 2%
  • Investors want 2% return pa for risk of call option.
#5

Thanks for the detailed explanation.