You are analyzing two comparable (same credit rating, maturity, liquidity, rate) U.S. callable corporate bonds. The following data is available for the nominal spread over the U.S. Treasury yield curve and Z spread and option-adjusted spread (OAS) relative to the U.S. Treasury spot curve.
|
X
|
Y
|
|
Nominal spread
|
145
|
130
|
|
Z spread
|
120
|
115
|
|
OAS
|
100
|
105
|
The nominal spread on the comparable option-free bonds in the market is 100 basis points. Which of the following statements is correct?
A. X only is undervalued.
B. Y only is undervalued.
C. X and Y both are undervalued.
D. Neither X nor Y is undervalued.