Option Adjusted Spread (OAS)

The yield spread, or risk premium, a bond with embedded options provides relative to Treasury securities. Option adjusted spread analysis is commonly performed on both callable and putable bonds as well as asset-backed and mortgage-backed securities. Although similar to the traditional spread calculation, OAS analysis differs in two distinct ways: 1) Each cash flow from the bond is individually compared to a corresponding Treasury maturity and therefore OAS can be viewed as an average spread over the entire Treasury curve. 2) OAS takes into account the fact that interest rates are likely to vary over the life of the bond by calculating the cash flows separately for each expected interest rate path.