Relative OAS Valuation - put/call

CFA Level II Fixed Income
#1

I was going over relative OAS valuation. Are the rules outline by schweser (i.e. OAS > 0 is overvalued if actual OAS < required OAS, and undervalued if actual OAS > required OAS) affected by if we’re evaluating put/call options? I think the rules stand regardless, because with Relative OAS valuation we have already removed the option from the spread.

If we are looking at callable bonds, if the required OAS is 190, and the OAS is 210, the bond is undervalued because our spread is too large (high yield), leading to low price.

If we are looking at puttable bonds, we need to make sure OAS > z-spread. But the rules still hold true because a higher OAS than the required means the bond is undervalued, and a lower OAS than required means the bond is undervalued.

Correct?

Thanks

#2

The nature of the option doesn’t matter, because the OAS removes the value of the option, leaving you with a spread for an option-free bond.

You _ always _ want a higher OAS.

#3

Mr. Magician, you never cease to amaze me. Thanks for simplifying everything

#4

You’re too kind.