John Tinker is a junior portfolio manager assigned to work for Laura Sykes, the manager of the corporate bond portfolio of a public pension fund. Ms. Sykes asked Mr. Tinker to construct a portfolio profile that she could use in her presentation to the trustees. One of the measures Ms. Sykes insisted that Mr. Tinker include the option-adjusted spread of each issue. In preparing the portfolio profile, Mr. Tinker encountered the following situations that he did not understand. Provide Mr. Tinker with an explanation.

a. Mr. Tinker checked with several dealer firms to determine the option-adjusted spread for each issue. For several of the issues, there were substantially different option adjusted spreads reported. For example, for one callable issue one dealer reported an OAS of 100 basis points, one dealer reported 170 basis points, and a third dealer 200 basis points. Mr. Tinker could not understand how the dealers could have substantially different OAS values when in fact the yield to maturity and nominal spread values for each of the issues did not differ from dealer to dealer.

b. The dealers that Mr. Tinker checked with furnished him with the nominal spread and the Z-spread for each issue in addition to the OAS. For all the bond issues where there were no embedded options, each dealer reported that the Z- spread was equal to the OAS. Mr. Tinker could not understand why.

c. One dealer firm reported an option cost for each issue. There were positive, negative, and zero values reported. Mr. Tinker observed that for all the bond issues that were putable, the option cost was negative. For all the option-free bond issues, the reported value was zero.