busterbluth

zoya Wrote:
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> In the sense of the difference between the OAS and
> the z spread, the difference IS the option cost.
> So OAS does in fact fully reflect the fact that
> the cashflows from a a bond that can be called are
> different from an otherwise identical noncallable
> security.


thats right. Think of two rate trees with all the same attributes except one is callable and one is not.

The price for the non callable, less the price for the callable is the option cost.

The "spread" or percentage over the callable options interest rates at every point in the tree that would make the value equal to that of the Z-Spread (market price of the non callable bond)