OAS lower but bond price also lower?

CFA Level II
#1

If volatility goes up, price of callable bond goes lower since callable bond = non-callable - option price.

What about OAS? OAS = Z Spread - Option. If option price goes up, OAS goes down. Usually lower spread (lower int rate) = higher bond price.

How do these 2 reconcile. I am sure I amissing something simple but brain is fried. Thanks

#2

Key is that the cash flows change due to option. The spread isn’t used for valuation, the rates are

#3

OAS is based on a volatility assumption - you estimate the vol, then create the binomial tree. then calc the bond and OAS

if the vol increases I believe you would recreate the tree and recalculate the bond price (as the above posted stated). the OAS and Z spread etc will change with new vol assumptions.