OAS

[Black Mage]

What is OAS? How does interest rate volatility affect it?

[Kenny]

Have you scanned these?

http://www.actuarialoutpost.com/actu...earchid=105283

[Black Mage]

Nope, most likely because there is nothing at that link.

[Kenny]

Originally Posted by Black Mage

Nope, most likely because there is nothing at that link.

Sorry, just search this section using "OAS". There were a number of threads covering the topic. Not sure if they will answer your question though bc I only glanced at a couple of them.

[Kenny]

Check out these 2.

http://www.actuarialoutpost.com/actu...&highlight=OAS

http://www.actuarialoutpost.com/actu...&highlight=OAS

[E]

While we're beating the dead horse affectionately known as OAS, I figured I'd throw another question out there. . .

One of the readings (and I just can't recall which one at the moment) makes a statement that OAS assumes a flat yield curve. Does anyone know what they are talking about? This just doesn't seem true. The OAS itself is constant, but I thought it was layered over the entire spot (or forward?) curve. The shape of the yield curve should be immaterial.

[Tim><]

Originally Posted by E

While we're beating the dead horse affectionately known as OAS, I figured I'd throw another question out there. . .

One of the readings (and I just can't recall which one at the moment) makes a statement that OAS assumes a flat yield curve. Does anyone know what they are talking about? This just doesn't seem true. The OAS itself is constant, but I thought it was layered over the entire spot (or forward?) curve. The shape of the yield curve should be immaterial.

I think this is more of a conceptual issue. Think about it this way:

If interest rates were 1% for T-Bills, a 300 bp spread to invest in a BB rated bond would be extremely tempting. If interest rates for 18% for T-Bills, a 300 bp spread would be far less tempting.

The whole concept of an OAS assumes that the additional spread required by investors is constant for all individual spot rates. This is only true in RL is the yield curve is flat.

I don't think that this is required knowledge for the exam.

[E]

Originally Posted by Tim><

I think this is more of a conceptual issue. Think about it this way:

If interest rates were 1% for T-Bills, a 300 bp spread to invest in a BB rated bond would be extremely tempting. If interest rates for 18% for T-Bills, a 300 bp spread would be far less tempting.

The whole concept of an OAS assumes that the additional spread required by investors is constant for all individual spot rates. This is only true in RL is the yield curve is flat.

I don't think that this is required knowledge for the exam.

Thanks -- that's actually really informative and is the kind of theoretical answer I was looking for. I had never thought about it in those terms. Perhaps that's an 8V concept, but still good to know.

[ssb]

I reviewed several threads about OAS, feeling even worse.
Anyone has any idea how SOA test us on OAS?
Is there any question asking you to actually calculate an OAS or use the formula OAS=YTM spread - call option in bps?

[asdf]

Hi, the Fabozzi textbook contradicts the hell out of itself regarding OAS because it's written by different authors with differing definitions (it seems).

Would this interpretation be right?:

OAS = Yield - Option Cost

magitude wise, we're expecting OAS ~ Yield ,because Option Cost = 0 if the bond is fairly priced?

where Option Cost is the constant spread when added to the yield curve that makes theoretical value = mkt price

where OAS = avg spread to Treasury curve implied by mkt price

If this interpretation is right, then Fabozzi himself in Ch34 is actually talking about the Option Cost when he is using the term "OAS".

Am I making any sense????????