An option-adjusted spread (oAS) on a callable bond is the Z-spread:
A) over the benchmark spot curve.
B) minus the standard swap rate in that currency of the same tenor.
C) minus the value of the embedded call option expressed in basis points per year.

Question

Quizplus · Accepted Answer

Option-adjusted spread (oAS) is the difference between the yield of a bond and the adjusted risk-free rate, where the adjustment is made for the embedded options in the bond. The oAS on a callable bond is the spread over the benchmark spot curve, minus the value of the embedded call option expressed in basis points per year. Therefore, option C, which states that the oAS is minus the value of the embedded call option expressed in basis points per year, is the best choice.

An Option-Adjusted Spread (OAS) on a Callable Bond Is the Z-Spread