How come the nominal spread does not take into account the term structure of interest rates or impact of emnbedded options on the bonds? I thought the nominal spread merely adjusts the risk free rates to new interest rates that would make the new interest rates equal to the security price, and this could include the impact of embedded options and the interest rate term structure.
How does the option adjusted spread include the impact of the term structure of interest rates, but nomial spread does not?
To build on your article, is the OAS is built off forward rates, and therefore spot rates. Since the spot rates comprise the term structure of interest rates, the OAS does in fact take into account the term structure of interest rates in its calculation?
The OAS is added to 1-period forward rates, not to spot rates.
There is a term structure of par rates, a term structure of spot rates, and a term structure of forward rates. The spot rates do not compose _ the _ term structure of interest rates; they compose _ a _ term structure of interest rates.
Yes, the OAS takes the term structure into account.
I just do not get how the nomial spread would not take into account the impact of embedded options.
Yes, the nomial spread is at one point in the curve, but couldn’t that one point in the yield curve take into account the value of the embedded options (relative to the yield of the benchmark at that point in time)?