Question #71
Reading: Reading 27 Valuation and Analysis of Bonds With Embedded Options - Anwers
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Question
An analyst has constructed an interest rate tree for an on-the-run Treasury security. The analyst now wishes to use the tree to calculate the convexity of a callable corporate bond with maturity and coupon equal to that of the Treasury security. The usual way to do this is to calculate the option-adjusted spread (OAS):
Answer Choices:
A. compute the convexity of the Treasury security, and add the OAS
B. compute the convexity of the Treasury security, and divide by (1+OAS)
C. shift the Treasury yield curve, compute the new forward rates, add the OAS to those forward rates, enter the adjusted values into the interest rate tree, and then use the usual convexity formula. Explanation The analyst uses the usual convexity formula, where the upper and lower values of the bonds are determined using the tree. (Module 27.5, LOS 27.i)
No explanation available for this question.