Question #32
Reading: Reading 27 Valuation and Analysis of Bonds With Embedded Options - Anwers
PDF File: Reading 27 Valuation and Analysis of Bonds With Embedded Options - Anwers.pdf
Page: 13
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Question
Generally speaking, an analyst would like the option adjusted spread (OAS) to be large, controlling for:
Answer Choices:
A. Credit and liquidity risk
B. Credit, liquidity and option risk
C. Option risk. Explanation OAS is "Option-adjusted" and hence includes no compensation for option risk: OAS is compensation for taking credit and liquidity risk. (Nominal spread, by comparison, includes compensation for liquidity risk, credit risk, and option risk.) Analysts prefer higher OAS, after controlling for credit and liquidity risk. (Module 27.4, LOS 27.g)
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