Reference: Schweser, Fixed Income, pg 198 How do you distinguish between the ‘required OAS’ and the ‘actual OAS’ against a required benchmark - is required OAS always the market value and actual OAS the value derived using theoretical spot rate?
I am not referencing the pages you talked about when I answer this. Just saying what I know. A required OAS is the OAS you require above a give benchmark for a given bond. For example, Say you have a corporate bond name XYZ You require that bond to have an OAS of 100 above treasury spot curve You also require it to have 0 OAS when compared to other bonds issued by the same firm (we assume same credit and liquidy etc for all bond of the firm) If you decided to calculate the actual OAS using treasury as a benchmark… You use the treasury tree, and by trial and error you solve for the actual OAS. You do so by increasing or decreasing each rate in the tree by the same amount untill you find the adjustment that will cause your tree to give market value (current price for the bond) So say you start by adding 10 basis point to each rate in the tree, you get a price of 110 out of the tree, but the market price of the bond is 100. Now you try 20 basis point, you get a price of 100 out of the tree. Then 20 is your OAS. Since you require an OAS of 100 above treasure. This bond does not give you teh OAS you require and you should not buy it. Maybe you can short sell it and profit. -------------------------- You can do the same proccess as above, but using the issuers curve instread of treasury same exact method. but now we compare to the require OAS of 0 an not a 100. I dont think anything i said above is wrrong. Pardon me if it is, and someone let me know plz. And let me know if you still have questions