Just like the title says. Thanks.
The OAS is zero when there are no embedded options. Not sure about negative.
When the bond trades at a yield lower than its benchmark. If you choose a High Yield Bond Index as a benchmark for IBM Corp Bonds, then its possible. I don’t see why any1 wud do it though.
OAS is not Zero when there are no Embedded Option. When there is no embedded option, OAS = Z Spread but not Zero. OAS is simply the spread that exists if u remove the option. It is not the premium that u pay for the presence of an option.
I thought the same, but if there is no option, then option cost = 0. So OAS = Z-spread - option cost OAS = Z-spread - 0 OAS = Z-spread I believe OAS is zero when there is no liquidity risk, option risk or modelling risk. Not sure about negative … Chuckrox8 Wrote: ------------------------------------------------------- > The OAS is zero when there are no embedded > options. Not sure about negative.
it may be useful to think of it like this: the bondholder gets a spread for each type of risk. how many different spreads he gets depends on what benchmark you use. so for a corp bond, if u use treasuries, u need a spread for credit risk. if u use an issuer benchmark, there is no spread for credit risk, cos its already factored in. so if u add a spread for option risk among other things, its called the z-spread. if you remove the option risk, its the OAS or option removed spread. even after removing the option risk we are left with other types of risk, therefore the OAS will be positive, unless you choose a benchmark such that the only type of risk left to add is the option risk, and sans that everything else is already there in your benchmark, the OAS will be positive.
when the bond over priced compared to an index.
the OAS will be zero when the callable/putable bond is fairly priced vs. a comparable benchmark with similar credit risk. however, if the benchmark is higher credit, such as a treasury or swap curve, an OAS less than or equal to 0 is overvalued, lower yield/higher price. the holder will require an additonal spread above benchmark to be compensated for credit, liquidity risk, etc. if the OAS is greater than the required spread (depends on benchmark/issuer), the bond is undervalued.
You have to think about it as OAS compared to REQUIRED OAS…