i don t understand the oas definition: "it measures the spread over a variety of possible interest rate paths, including the effects of embedded options". "It removes the effects of embedded options"..... (i am re-reading the level 1 stalla material, because I remember understanding it last year...and it doesn t help so much )
I feel like i am just missing a step in the reasoning, but I spent too much time reading stuff on google and confusing me more. Could someone please give me a simple answer ?
thanks作者: ningning1984 时间: 2011-7-11 19:38
OAS is removing the value of the option to make the bond comparable to bonds with similar features that are not call/putable. A call or put option can either add or subtract value from the investment. Think in terms of an issuer, you will have to provide additional incentive to an investor if you have the right to call the bond at certain levels. That right, similar to an option, will cost the issuer money they will pay in terms of additional interest. The holder will earn extra yield for a callable or receive less for a putable bond because they now have the right to put the bond back to the issue. Since traditional bond analysis can't deal with this structure OAS was created to compare the bonds on more relative basis.作者: b_sea93 时间: 2011-7-11 19:38
thank you very much for your answers, that really helped !
