for callable bond,
OAS + call option = Z-spread a lower OAS = overpriced higeher OAS = underpriced
what about putable bond? OAS - put option = Z spread
anyone can advise whether it is correct to say that…
lower OAS =underpriced higher OAS = overpriced
thanks!
If the option cost is positive then it is a callable bond as the borrower is paying a higher interest than the option free bond .
if the option cost is negative then it a putable bond as the borrower pays lower int rates as the risk is lower.
if OAS is lower than the comparable bond then it is underpriced…
It’s incorrect.
It is always the case that an underpriced bond has a higher OAS than comparable bonds, and an overpriced bond has a lower OAS than comparable bonds. Whether the embedded option is a call option, a put option, a prepayment option, a conversion option, or anything else.
Also, it is always the case that OAS + option value = Z-spread, irrespective of the type of option; call options have positive value (i.e., a higher Z-spread than OAS) and put options have negative value (lower Z-spread than OAS).
Any chance you’re working on a blog post explaining these concepts? 
Indeed.
Unfortuntely, the latest update of WordPress (which I use to create my webpages) has a glitch: I can no longer paste Excel graphs into the visual editor. I hope that they get that fixed soon; it’ll kill me if I cannot put in graphs.