Option Adjusted Spreads

This course examines the risk and return measurements associated with callable structures, such as mortgage backed securities. Whereas non-callable corporate bonds are priced as a spread to US Treasuries, bonds with embedded call options trade on an option adjusted spread (OAS) to Treasuries/swaps. This course will define OAS and introduce effective duration as the appropriate risk measure for bonds with embedded options. Bloomberg screens are used to understand which variables affect OAS, including interest rate changes, shifts in the yield curve, and volatility. Effective convexity is examined.

Course Objectives

By the end of the course, participants will be able to:

• Discuss and contrast different yield curves
• Explain different risk and return measures including
  • Nominal spreads
  • Z-spreads
  • Option adjusted spreads
  • Effective duration and convexity
• Identify the variables that affect OAS

Suggested Prerequisites:

• Fixed Income
• Bond Math or equivalent knowledge

Program Level: Intermediate

Advance Preparation: None

Computers and Financial Calculators: Calculators

Recommended CPE Credits: 7