CHAPTER 10 FOCUSED on how to determine the option-adjusted spread and embedded option value of a nonbullet bond. This chapter will discuss how the scope of the analysis may be extended to draw further insights into a bond’s performance. The discussion will be facilitated by considering $100 face amount of the Pacific Bell (AT&T) 6.625% bond due 10/15/34.
This issue, introduced in Chapter 1, contains a provision allowing Pacific Bell (AT&T) to call the bonds on or any time after 10/15/13, twenty years before maturity. TABLE 11.1 shows an option-adjusted spread (OAS) analysis for this bond. At a price of $100.45 and an assumed volatility of 12.6 percent per year, the Pacific Bell (AT&T) bond has an OAS of +76.2 ...

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