Option Adjusted Spread

CFA Level II Fixed Income
#1

Hello,

Could someone help me understand the answer to the below question:

the price calculated in the at 15% volatility is $99.29, the OAS for the callable bond at 20% volatility will be:

  1. lower.
  2. the same.
  3. higher.

The answer is A lower.

Why would it be lower?

Value of Callable bond = Value of Straight - Value of Option.

Value of option will increase with volatity so the value of Callable bond should decrease. Hence the OAS should increase to decrease the price of the bond?.

What am I missing?

Thanks.

#2

OAS = z spread - option cost right?

so I would expect option cost to increase as volatility increases which should imply that OAS decreases with increasing vol - all else equal.

#3

The value of the bond stays the same.