OAS - Option adjusted spread (for the @CFA Level 1 exam)

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.

[@angtran6638]

I have problems understanding this LOS on the curriculum and this video is super helpful. Thank you so much.

[@michaelchao3063]

supremely helpful esp for the fixed income section!

[@letmeexplaincfa]

Thank you🙏

[@sahilmadhamshettiwar6847]

Lovely explanation helped a lot

[@orsolyakantor7163]

Thank you so much! That's very helpful!

[@swapnilKshinde]

Thank you so much sir

[@eklavya1349]

sir , i want to confirm is there any concept of option adjusted price ( last topic of embedded option bond ) which has not been covered by you ?

[@x6011]

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!

[@letmeexplaincfa]

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.

[@QuanNguyen-km2zb]

@@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.

[@letmeexplaincfa]

@@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).

[@adityamahajan64]

Love you videos. Request you to cover some duration related questions and explanations too, if feasible?

[@letmeexplaincfa]

Thanks so much! I have actually made some videos which relate to duration:
Computing modified duration: ua-cam.com/video/PjDT0aZ2nd0/v-deo.html
Convexity adjustment: ua-cam.com/video/eNwVM8pU0Uo/v-deo.html, where duration is also heavily analysed and applied :)

[@Mateo-us4bn]

OAS = Z_spread - Option Value for a callable bond....
So for a put it should be OAS = Z_spread + option value ?? Yes?

[@letmeexplaincfa]

Essentially, yes. For callable bonds: OAS < Z-spread, whereas for putable bonds: OAS > Z-spread.

[@travisbradfield1311]

Hi, what about the I spread

[@christopherbarrett9900]

Thanks so much!

[@letmeexplaincfa]

You're welcome!

[@fadiaodeh8574]

Thank you 😊

[@letmeexplaincfa]

You are very welcome👍

[@macaroniandcheeze]

Thanks a lot sir

[@letmeexplaincfa]

You’re welcome!

[@fingerscrossed5313]

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.

[@letmeexplaincfa]

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 :(