OAS is a kind of credit spread? Refer to the Schweser Notes in 2017, OAS is a spread which makes value of a bond equal to market price and is added to ‘risk-free spot rate’. Please check my understanding below:
“OAS is easily used for risky bond with binomial tree, which can adjust the probability of option exercise. And this spread should be equal to the peer’s spread because of the same credit risk.”
Yes. Many times bonds will have embedded options. The OAS is used to compare two bonds that may have different embedded puts/calls. The “spread” then is the discount rate minus the rfr.
Also, In extremely volatile times, when value of options goes up, OAS gets close to zero or keeps reducing. when it is close to zero or zero, it will price the bond close to market price.
It is not correct. OAS the adjustment for credit risk. When value of options goes up, bonds with put option are more likely to default. Consequently OAS would also goes up. In my understanding, OAS for bond with put option would always be greater than the OAS for bond with call option.
If OAS is calculated correctly, it will remove the value of any embedded option (or, more accurately, any embedded potential change in cash flows), giving you the spread on the underlying, option-free bond. Therefore, if you have two otherwise identical bonds, one of which is callable and one of which is putable, their OASs should be the same. If they’re different, at least one of them is wrong.