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Basic Question 8 of 13

You have applied your favorite valuation model to a bond with an embedded option and found an option-adjusted spread (OAS) spread of 40 basis points, while the Z-spread has been calculated at 207 basis points. What is the option cost?

A. 167 basis points
B. 185 basis points
C. 207 basis points
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User Contributed Comments 4

User Comment
olagbami option cost: z spread-OAS
bodduna Z spread = OAS + Option Cost
CJPerugini If OAS < Zspread, then Call Option
If OAS > Zspread, then Put Option
tomalot My favorite bond valuation model...how can I choose just one!?
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I am using your study notes and I know of at least 5 other friends of mine who used it and passed the exam last Dec. Keep up your great work!
Barnes

Barnes

Learning Outcome Statements

explain the calculation and use of option-adjusted spreads;

explain how interest rate volatility affects option-adjusted spreads;

CFA® 2025 Level II Curriculum, Volume 4, Module 28.