The longer the deferred call period,the closer the value of the Option adjusted spread will be to the nominal spread.
Please can some one explain this to me.?
Suppose you have two otherwise identical 10-year bonds: bond A is callable after 5 years, while bond B is callable after 9 years.
Which call option is worth more to the issuer: A’s or B’s?
A
Both the nominal spread and OAS account for such factors as credit risk, liquidity, and tax effects. The OAS also accounts for volatility in interest rates to measure the impact of embedded options. The call period is deferred longer, the value of the embedded option is less. It is more like a non-callable bond. This makes the adjustment to get from the nominal spread to the OAS less.