1a. Why is the yield spread between a bond with an embedded option and an otherwise comparable Treasury security referred to as a "nominal spread"?

2b. What is an option-adjusted spread and why is it superior to a nominal spread as a yield spread measure for a bond with an embedded option?

3Max Dumas is considering the purchase of a callable corporate bond. He has available to him two analytical systems to value the bond. In one system, System A, the vendor uses the on-the-run Treasury issues to construct the theoretical spot rate that is used to construct a model to compute the OAS. The other analytical system, System B, uses the on-the-run issue for the particular issuer in constructing a model to compute the OAS.

3a. Suppose that using System A, Mr. Dumas finds that the OAS for the callable corporate he is considering is 50 basis points. How should he interpret this OAS value?

3b. Suppose that using System B, Mr. Dumas finds that the OAS computed is 15 basis points. How should he interpret this OAS value?

3c. Suppose that a dealer firm shows Mr. Dumas another callable corporate bond of the same credit quality and duration with an OAS of 40 basis points. Should Mr. Dumas view that this bond is more attractive or less attractive than the issue he is considering for acquisition?

4.What is the value of a 5-year 6% coupon bond selling to yield 4.5% assuming the coupon payments are made semiannually?

5. Assuming the bond is selling to yield 5.25%, compute the duration basd on a 25 basis point rate shock:

Yield	Coupon rate 5%, 25 year maturity
5.00%	1,000
5.25%	960
5.50%	945