Hello,
Does any one have a good way of memorizing what spread is needed for which Securities, (MBS, Option Free, Corporate Callable etc,)and does anyone have a good explanation of the OAS spread?
If it has an option (callable, puttable, prepayment) use OAS
If there is no option use Z-spread
Another way to think of it is you always use OAS but if there is no option then OAS = Z-Spread
Option adjusted spread is just the Z spread adjusted for the cost of the option.
The OAS removes the value of the option; it’s the spread for the same bond if it didn’t have an embedded option.
Z-spread – OAS = option cost (measured in bp of yield). The option cost is positive for options owned by the issuer (call option, prepay option, cap on a floater); the option cost is negative for options owned by the bondholder (put option, conversion option, floor on a floater).
Do I understand it correctly?
Assume that OAS = 100. Both call and put option costs = 10. Would it look like this? Z-spread = OAS + option cost for call: 110 = 100 + 10 for put: 90 = 100 - 10.
Does Z-spread for callable bond should be higher than for putable bond? (assuming that other characteristics of bonds are the same)?
Yes.
Gracia amigo!
De nada.