The Option-Adjusted Spread (OAS) is a measure of the difference in yield between a bond with an embedded option, such as an MBS or callables, and the yield on Treasuries. OAS can be used to compare different types of bonds with each other and also to assess their riskiness relative to Treasury securities. This makes it useful for investors who are looking for higher returns but want to evaluate potential risks before investing.To calculate OAS, one must first determine the expected return from a security by taking into account its credit quality as well as any embedded options that may affect its value over time. The expected return is then compared against what would be earned from investing in an equivalent Treasury security without any additional risk factors taken into consideration; this comparison yields the spread between them which becomes known as OAS.In summary, OAS measures how much extra compensation investors receive when they take on additional risks associated with certain investment vehicles such as MBSs or callables instead of just buying low-risk Treasuries directly; understanding this concept can help them make more informed decisions about where they put their money and potentially earn greater returns while still managing overall portfolio risk appropriately.
