Would someone help me out about the OAS?


I’m suffering understanding the OAS.

First, I have learned that in the process of pricing the corporate bond, the spread that is added to forward rate would be upward-sloping. That means the first coupon would be discounted with 1+f(1)+s(1) and the second coupon would be discounted with 1+f(2)+s(2).

But in the example of the CALLABLE BOND, OAS is a spread in which option cost is eliminated from the Z-spread. And therefore OAS and Z-spread would be a curve that is parrallel to the US treasury. This does not accord with the fact that sector-specific spread is different on every period.

And also, I do not get why investors do calculate the OAS and how can they do that? I have understood as the following process; If the maket price of security is given, I can depict the Z-spread. And then using the bionomial tree or through Monte Carlo Simulation, get the value of the option and eliminate from the Z-spread. Is it correct?

I have so hard time understanding about it and so it would be SUPER THANKFUL who can answer to my question. Thkns.

OAS (presumably) eliminates the value of any embedded options, allowing a comparison between option-embedded bonds and option-free bonds.

Thanks for answering. May I ask you one more?

I saw your reply on other question. It says that OAS is added to forward rates to get the market price. Why does OAS is added instead of the Z-Spread? In the case of the callable bond, investor expect higher yield as a reward of the call option. And as i understood that added yield because of the option is embedded in Z-Spread.

Thanks a lot.

Because in a binomial tree the value of any embedded options is removed, so the spread has to have the option value removed as well. OAS has the value of the options removed; z-spread does not.