hard · Principles of Finance valuation
A 10-year callable bond trades with an Option-Adjusted Spread (OAS) of 150 bps.
If the Z-spread is 180 bps, what is the 'option cost' and what does it represent?
- -30 bps; the discount investors receive for the call's volatility
- 330 bps; the total spread including the value of the call
- 30 bps; the premium paid by the issuer to the investor for the call right
- 30 bps; the yield investors give up for the issuer's right to call
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