FRM II-mock 2
Finance Junkie
Posts: 205
Joined: Mon Feb 04, 2013 3:35 pm

FRM II-mock 2

Postby » Mon Oct 27, 2014 3:01 pm

For two comparable US callable corporate bonds, which have the same credit rating, maturity and
liquidity rate, the following data is available –
nominal spread 160 120
Z spread 110 105
OAS spread 100 95

Note that the nominal spread over the US treasury yield curve and Z spread and option adjusted
spread relative to the US treasury spot curve.
The nominal spread on comparable option free bonds is 100 bps. Which of these is most likely to
be correct?
Select one:
a. B is undervalued
b. A is undervalued
c. A & B both are undervalued
d. Neither A nor B is undervalued
The correct answer is B.
The OAS of the bonds should be compared with the nominal spread on comparable option free
bonds. Bonds with higher OAS and low option cost are undervalued

I cant understand the workings ... please explain

Finance Junkie
Posts: 730
Joined: Wed Apr 09, 2014 6:28 am

FRM II-mock 2

Postby edupristine » Wed Oct 29, 2014 10:26 am

Whenever you have find out whether a security is undervalued or overvalued, always look at the OAS. The one with higher OAS is always undervalued.

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