OAS and volatility of interest rates.

CFA Level II Fixed Income
#1

Elan’s notes say “The higher the interest rate volatility assumed, the lower the OAS for a callable bond.”

Isn’t OAS unaffected by Volatility? To my understanding, the higher the interest rate volatility, the higher the option cost and effectively the higher the z-spread, but OAS shouldn’t be affected by this.

Thanks in advance.

#2

OAS = Z-Spread - Option Cost, so since the option cost goes up with vol, OAS goes down

The Z-Spread is unchanged (zero-volatility)

#3

Got it… thanks! I was thinking opposit