OAS vs. yield curve or spot rate curve

CFA Level II
#1

Is the OAS determined with respect to Treasury yield curve or the spot curve? Some thing is not gelling for me here folks!

#2

spot curve, but it doesn’t have to be treasury, it could be over curve for a grade of bond, issuer, industry, etc, its a relatve measure and the benchmark will always be provided.

#3

Grace Grace - OAS is the spread taking out the option. So say you have a callable bond with a spread of 6%. You may want to find the value if it didn’t have the callable option attached. Say without the option the spread could be 8%. So thats the OAS.

#4

Reverse that. A callable bond trades at a Z-spread of 8% (wow) and without the option it would trade at an OAS of 6%. So that’s a really credit risky bond for which the call option is really valuable. Hmm… Can we really be simultaneously worried about default and calling the bond? Our default issues are over if they call the bond. I guess this happens though…

#5

I think of OAS as a means of comparing apples to apples ie. option free bonds with option free bonds.

#6

JoeyDVivre Wrote: ------------------------------------------------------- > Reverse that. A callable bond trades at a > Z-spread of 8% (wow) and without the option it > would trade at an OAS of 6%. > > So that’s a really credit risky bond for which the > call option is really valuable. Hmm… Can we > really be simultaneously worried about default and > calling the bond? Our default issues are over if > they call the bond. I guess this happens > though… Right.

#7

thanks folks i agree this is a simple concept i got easlt the first time i read…now going over and …!#@#@@@$ iguess i am tired but that bit about zero OAS and its meaning in the other thread remains outstanding I will get back on thatthread for you guys to cut me rough edges off… thanks wish u a happy june 7

#8

Search is my friend… JD’s response in a prior thread: ‘Reverse that. A callable bond trades at a Z-spread of 8% (wow) and without the option it would trade at an OAS of 6%’ My interpritation is therefore: Because without the call option, you’d happily pay more (i.e. cash flows discounted less