Question: Why is an option-adjusted spread more suitable for a bond with an embedded option than a yield spread?

Why is an option-adjusted spread more suitable for a bond with an embedded option than a yield spread?

Step by Step Solution

★★★★★

3.44 Rating (160 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer
Step: 1 Unlock

A bond with an option can be broken down into both a bond and an option Thus i... View full answer

blur-text-image
Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock
Step: 3 Unlock

Document Format (1 attachment)

Word file Icon

518-B-C-F-B-V (561).docx

120 KBs Word File

Students Have Also Explored These Related Corporate Finance Questions!

Q:

What is an option? When and why is an option important?

Q:

What is the market value for a bond with a face value of $1,000 and a newspaper quotation of 77?

Q:

An embedded option associated with each of the following instruments potentially alters the rate sensitivity of the underlying instrument. Indicate when the option is typically exercised and how it...

Q:

1. Willier is the research analyst responsible for following Company X. All the information he has accumulated and documented suggests that the outlook for the firms new products is poor, so the...

Q:

Domsel 2, 2013, bendey. Min T EJ001 Introduction to Financial Instruments and Markets 13. Suppose a bond's price is expected to increase by 5% if its market discount rate decreases by 100 basis...

Q:

1. Given the yield curve for US Treasury zero-coupon bonds, which spread is most helpful in pricing a corporate bond? The: A)Z-spread. B)TED spread. C)LIBOR-OIS spread. 2. An option-adjusted spread...

Q:

Suppose the market price for a 4-year 7% non-Treasury bond with an embedded option and annual payments is $105.5536. Moreover, suppose the current yield curve and spot curve are upward slopping as...

Q:

Suppose the market price for a 4-year 7% non-Treasury bond with an embedded option and annual payments is $105.5536. Moreover, suppose the current Treasury yield curve and Treasury spot curve are...

Q:

Below is the information sheet for 2 option-embedded bonds. Characteristic Value for Bond 1 Value for Bond 2 Type Government Corporate Maturity 4 years 4 years Coupon rate 6 % 6 % Compounding Annual...

Q:

Which of the following statements is/are incorrect ? I. A higher volatility assumption would result in a lower value for a callable bond. II. The value of an embedded call option (in a callable bond)...

Q:

Risk is generally expressed or plotted in a Risk Matrix in terms of Frequency and Severity. Please explain and plot Fire, Minor Medical Surgeries, Shop lifting, Third- party property damages risks in...

Q:

Purpose: To help you understand the importance of cash flows in the operation of a small business. Youre pretty excited about your cash balance at the end of the month because this was the month you...

Q:

Give a brief overview of 5 G wireless systems with special emphasis on their distinguishing features compared to the traditional 1 G - 4 G wireless systems. ( 5 Points )

Q:

Why would it be difficult to identify a firms cost of capital for use in capital budgeting if you were unsure of how large the capital budget was likely to be?

Q:

If two portfolios have the same duration, the change in their value when interest rates change will be the same. Explain why you agree or disagree with this statement.

Q:

For a corporate bond that has a low credit rating, why might an analytical duration be limited as a measure of interest-rate risk?

Q:

Calculate the requested measures in parts (a) through (f) for bonds A and B (assume that each bond pays interest semiannually): (a) What is the price value of a basis point for bonds A and B? (b)...

Q:

21. On February 17, 2022 the US 10-Year Treasuries hit 3.81%, a 13% increase over the rates roughly one month ago (January 18) when the US-10 Year was at 3.37%. (a) Assume that the real interest rate...

Q:

We are considering an acquisition of an existing medical office building (MOB) to our portfolio. There are 4 tenants. Tenants 1 and 2 occupy 15,000 and 8,000 square feet respective, at $19.00 per...

Q:

8 . Consider a scenario where a stock is trading at $ 1 0 0 per share, and there are both call and put options available with $ 1 0 0 strike prices and a nine - month maturity period. When evaluating...