Saturday, April 18, 2015

fixed income - What is the difference between Option Adjusted Spread (OAS) and Z-spread?


I am preparing for the CFA level 2 exam, I got confused by the concept Z-spread and OAS.


When a call option is added to a bond, since it is not favorable to the bond buyer, they would require more spread (which is the OAS) for this instrument in order to get more discount on the bond price.


So to me, Z spread should be less than the OAS.


But this is not what has been discussed in the book. Can someone help with this?




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