Here's the overall definition of spread duration (Wikipedia gives it in more detail): Spread In other words, it's the sensitivity of a bond's market price to a change in Option Adjusted Spread (OAS). Thus the index, or underlying yield curve.
Option - adjusted spread (OAS) is the yield spread which has to be added to a benchmark yield curve to discount a security's payments to match its market price, Definition · Convexity · See also · References.
Wiki option adjusted spread - - journeyNot logged in Talk Contributions Create account Log in. For consumer loans, particularly home mortgages , an important yield spread is the difference between the interest rate actually paid by the borrower on a particular loan and the lower interest rate that the borrower's credit would allow that borrower to pay. These are call options, which give the issuer the right to redeem the bond prior to maturity at a preset price, and put options that allow the holder to sell the bond back to the company on certain dates.
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- However, it does not include the value of the embedded options, which can have a big impact on the present value.
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Bonds are priced based the spread investors are willing to pay above treasuries. These are call options, which give the issuer the right to redeem the bond prior to maturity at a preset price, and put options that allow the holder to sell the bond back to the company on certain dates. Assuming the term structure model is implemented using trees or lattices, then OAS is the spread added to each node i. Treasury Bond - T-Bond. The option-adjusted spread helps investors compare a fixed-income security's cash flows to reference rates, while also valuing embedded options against general market volatility. Option-adjusted spread OAS is the yield spread which has to be added to a benchmark yield curve to discount a security 's payments to match its market price , using a dynamic pricing model that accounts for embedded options.
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|RATED FREE VIDEOS||The OAS should not be confused with a Z-spread. This gives a single series of nominal cash flows, as if the MBS were a riskless bond. Option to Purchase Additional Insurance. Z-spread: discount to add to treasury for the option bond thus accounting for the option. The discussion of wiki option adjusted spread "negative convexity" and "option cost" of a bond is essentially a discussion of a single MBS feature rate-dependent cash flows measured in different ways.|