Can we compare two bonds, with different maturities & different coupons on the basis of OAS?
Please explain the rationale behind it.
Presumably, OAS should only be comparable for bonds with similar expected duration.
Yes.
Assuming that the risks are comparable, you would choose the bond with the higher OAS.
If the risks are substantially different, however, comparing the OASs is likely not to be particularly useful.
Are you sure about that?
If you have two bonds – one callable, one putable – that are otherwise identical, their effective durations may be quite different, but their OASs are comparable.
I’m not a fixed income practitioner, so I have to think about this. I suspect I might be confused on this definition.
Thanks mate!
My pleasure.