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# If a callable bond has an option-adjusted spread (OAS) of 75 basis points, this most likely suggests:

Question:

A
the bond has a zero-volatility spread greater than 75 basis points.

Explaination

For a bond with an embedded call option, the OAS is less than its zero-volatility spread by the option cost. Therefore, the zero-volatility spread is greater than the OAS for callable bonds. If the embedded call option has any value to the issuer, a callable bond with an OAS of 75 basis points will have a Z-spread that is greater than 75 basis points. Because the OAS represents the bond's spread to the spot yield curve excluding the effect of the embedded option, it does not include any compensation for the volatility risk related to the option. The implied cost of an embedded option is the difference between the bond's zero-volatility spread (not the nominal spread) and its OAS.

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