OAS - Option adjusted spread (for the @CFA Level 1 exam) explores the computation of an option-adjusted bond value given a Z-spread and the option value expressed in basis points.
Hello Wojciech, I really enjoy watching your videos. Anytime I get stuck with a topic I search for your video on that topic and once I find it, I find the solution to my challenge. I would really be pleased if you can direct me to an equally simplified level III tutor that I can subscribe to.
thank you for your message and kind words. Unfortunately, I do not have much knowledge of what other tutors are doing, certainly not enough to make recommendations :(
Thanks so much! I have actually made some videos which relate to duration: Computing modified duration: ru-vid.com/video/%D0%B2%D0%B8%D0%B4%D0%B5%D0%BE-PjDT0aZ2nd0.html Convexity adjustment: ru-vid.com/video/%D0%B2%D0%B8%D0%B4%D0%B5%D0%BE-eNwVM8pU0Uo.html, where duration is also heavily analysed and applied :)
Dear professor, it confused me that the price of callable bond supposed to be lower the non-option bond because it is not favorable to bond holders. So why the price of callable bond is higher than non-option bond by adding a lower spread, i.e. the OAS? thank you!
The price of the callable bond is calculated using the Z-spread. To arrive at the value of the bond WITHOUT the option we adjust the Z-spread downwards by the value of the option (46 bps) - getting a lower discount rate. This leads us to a HIGHER price for the non-option bond than for the callable.
@@letmeexplaincfa I don't think that's true. In the curriculum they said z-spread is to be used for a risky, option-free bond, while the OAS is for a risky with embedded option. I agree with @x6011 that for a callable bond, the oas should be higher than z-spread to reflect a lower price than an option-free bond. I keep seeing that "Z-spread - option value = OAS" but I haven't found any solid explanation. I see that this equation is only true for a PUTABLE bond, not a callable one.
@@QuanNguyen-km2zb The OAS is the Z-spread adjusted for option value. You use the Z-spread to value the bond with the embedded option but use the OAS to value an otherwise equal bond without the option. For callable bonds: Z-spread > OAS (a non-callable bond has a higher value than a callable one). For putable bonds: Z-spread < OAS (a non-putable bond has a lower value than a putable one).
