Z spread and OAS

CFA Level I Fixed Income
#1

if a callable bond has OAS of 75 basis points, this most likely suggests

  1. bond has zero volatility of spread greater than 75 bps

  2. implicit cost of call option is the bond’s nominal spread minus 75 bps

  3. 75 bps represent investor compensation for credit, liquidity and volatility risks.

which one is right answer? i though 3 was the right answer but it is not.

#2

is it 1? I think the OAS takes the option yield out of the Z-spread…so Z-spread would have to be higher.

#3

It’s number 1 isn’t it?

Because call options have a positive option cost. And using the formula: z-spread - OAS = Option cost

That would mean that the z spread is greater than the OAS (75bps)

#4

right 1 is the right answer