Option-Adjusted Spread

Option-adjusted spreads are calculated for bonds with embedded options (callable bonds, which present call risk to investors), for securitisations (which have pre-payment risk) or for bonds with non-linear or uncertain cash flows. OAS models consider the impact of the optionality embedded into callables, which neither nominal spreads nor z-spreads do. If, for bonds with no embedded options the OAS is the same as the z-spread, the OAS of a callable will be lower than the z-spread; the difference is the option value. Applying OAS modelling enables investors to compare bonds such as callables or securitisations with standard bonds.