OAS question

CFA Level II Fixed Income
#1

Bond with Put option

Z-spread: -40bp

Option cost: 25bp

Find OAS?

Answer says OAS = -40 + 25 = -15

However, shouldn’t OAS = z-spread - option cost? Also, since option cost is the bp cost to the issuer (i.e. they have to pay xbp for the call option) then a put option cost should be negative. Is the question wrong, or have I midunderstand something?

Thanks

Matt

#2

No the question is correct. Put option is valuable to the older and hence should be added to the Z spread to get the OAS.

#3

Right, it’s negative, so subtract the negative to add the positive.

That should probably read “option value” instead of “cost”

#4

Got it, thanks