FIXED INCOME -- Interest Rate Volatility and OAS
I have a few questions about the following statement that was made in R37 (Summary), excerpted as: “OAS is sensitive to interest rate volatility: The higher the volatility, the lower the OAS for a callable bond.”
1. For a callable bond, wouldn’t one expect the OAS to be greater than its equivalent for a putable bond because it is the bondholder that is taking most of the risk ?
2. Why does the author use the term “lower” as opposed to “smaller” ? I thought OAS was a positive spread that was added to the yield curve to recognize the added uncertainty of the presence of embedded options in a bond ?
Thanks all for your insight.
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