CFA Level 1 Exam

3959 Questions

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Question No. 1

Charlotte Villa, CFA, is a portfolio manager analyzing two securities. The 10-year bonds of Zehmer Corp. are callable beginning in two years. The 10-year bonds of Cavalier Inc. are not callable, but have a floating coupon that adjusts annually based on a margin above comparable maturity U.S. Treasury issues with no limits on the rate adjustment. Both bond issues are rated AA. Villa uses a computer model to value individual bonds based on their zero-volatility spread and/or option-adjusted spread (OAS). She decided to increase the interest rate volatility assumption in her model without changing any of the other model inputs. Identify how this change in assumption will affect the OAS for each bond.

Choose the correct option from the given list.
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