FI - OAS and relative value

CFA Level II Fixed Income
#1

Hello,

If interest rate volatility declines then the relative cheapness of a callable will increase. As interest rate volatility declines, the OAS for callable bonds will increase—that is, the relative cheapness increases.

Can someone explain the above, I am struggling to understand why the OAS would increase if IR vol falls.

Many thanks

#2

If vol declines the cost of the option declines.

Then plug away… formula Z - OAS = call option .

#3

Nice, thank you Sir!