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.