fixed income investment(z spread)

[tester_cfa]

study notes book5 page 160
Q10. bond A has an embedded option , a nomial yield spred to treasury of 1.6%, a zero-volatility spread of 1.4%,, and an OAS of 1.2%.
what embedded option for Bond A?

why the answer gives PUT? i think if z spread>OAS, the option should be call.
thanks

 

[martin.heidegger]

hi,

you're right, the given answer is wrong. Easy to get confused
with the signs...

Since the OAS is bigger for B, it means it is cheaper (bigger spread) while
otherwise identical to the option-free version of A, so it is "better value".

SInce the OAS for A is smaller then the z-spread, it means the version with the option is cheaper then the version without, so you sold an option (the call).

So the correct answer has to be (D).

cheers