Option-adjusted spread (oas), Financial Management

Option-Adjusted Spread (OAS)

The prime objective of an investor is to buy securities which have values greater than their market prices. The discussion made on the above valuation helps to arrive at a reasonably correct value of the bonds. Analyzing further, there is an opportunity to convert the divergence between the price observed in the market for the security and the value derived from the model into a yield spread measure. It appears convenient to the investors to compare the yields rather than the prices of bonds. Thus the yield spread measure comes very handy for the investor in taking decisions.

The Option-Adjusted Spread (OAS) is a measure of the yield spread (expressed in basis points) which can be used to convert differences between the values and the prices. It is thus basically used as a tool to reconcile value with market price. Since the cash flows of the callable bonds are adjusted to reflect the embedded option, the resulting spread is called option adjusted spread.

We have now observed that OAS is calculated using the valuation model. Working out in the reverse, it is possible to calculate the theoretical value for a given OAS. The assumed interest rate volatility affects the OAS as well as the theoretical value. The higher the expected interest rate volatility, the lower the OAS. Similarly the lower the expected interest rate volatility, the higher the OAS.

 

Posted Date: 9/10/2012 8:14:49 AM | Location : United States







Related Discussions:- Option-adjusted spread (oas), Assignment Help, Ask Question on Option-adjusted spread (oas), Get Answer, Expert's Help, Option-adjusted spread (oas) Discussions

Write discussion on Option-adjusted spread (oas)
Your posts are moderated
Related Questions
Q. Describe about Self-Employment Tax? Self-Employment Tax - Most individuals who are in business for themselves, like PARTNERS, SOLE PROPRIETORS or independent contractor ar


Question 1 There are several elements which you can take into consideration, while budgeting a project. Describe these elements Question 2 Explain the different methods/source

This assignment is an analysis of a U.S. publicly-traded company; its common stock could be a prospective investment. The report is due in Week 10, in needs to be at least 5 pages

given just the sales and profit values, how is the break-even sales calculated?

What are the benefits and drawbacks of financial hedging of the firm’s operating exposure vis-a-vis operational hedges (like relocating manufacturing site)? Answer:  Financial he

Assume you manage a $4.42 million fund that having of four stocks with the following investments: Stock Investment Beta A

Significance of cost of capital

What is a callable bond?  What is a putable bond?  How do each of these features affect their respective market interest rates? A callable bond may be retired untimely at the dis

Embedded Options  is a provision in the indenture that gives the issuer and/or the bondholder an option to take action against the other party.