Question: Bond A has an embedded option, a nominal yield spread to Treasuries of 1.6%, a zero-volatility spread of 1.4%, and an option-adjusted spread of 1.2%.

Bond A has an embedded option, a nominal yield spread to Treasuries of 1.6%, a zero-volatility spread of 1.4%, and an option-adjusted spread of 1.2%. Bond B is identical to Bond A except that it does not have the embedded option, has a nominal yield spread to Treasuries of 1.4%, a zero-volatility spread of 1.3%, and an option-adjusted spread of 1.3%. The option most likely embedded in Bond A, and the bond that is the best value, are:

A.Embedded option: Call; Better value: Bond B
B.Embedded option: Put; Better value: Bond A
C.Embedded option: Call; Better value: Bond A
D.Embedded option: Put; Better value: Bond B

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