What is the 'OptionAdjusted Spread (OAS)'
The optionadjusted spread (OAS) is the measurement of the spread of a fixedincome security rate and the riskfree rate of return, which is adjusted to take into account an embedded option. Typically, an analyst would use the Treasury securities yield for the riskfree rate. The spread is added to the fixedincome security price to make the riskfree bond price the same as the bond.
BREAKING DOWN 'OptionAdjusted Spread (OAS)'
The optionadjusted spread helps investors compare a fixedincome securityâ€™s cash flows to reference rates, while also valuing embedded options against general market volatility. By separately analyzing the security's two components  the bond and the embedded option  analysts can determine whether the investment is worthwhile at a given price. The OAS method is more accurate than simply comparing a bondâ€™s yield to maturity to a benchmark.
The OAS takes into account two types of volatility facing fixedincome investments with embedded options: changing interest rates (which affect all bonds) and prepayment risk. The shortfall of this approach is that estimates are based off of historical data, but are used in a forwardlooking model. For example, prepayment is typically estimated from historical data, and does not take into account economic shifts or other changes that might occur in the future.
OAS is most likely to be used in the valuation of mortgagebacked securities. In this sense, the prepayment risk is the risk that the property owner may pay back the value of the mortgage before it is due. This risk increases as interest rates fall. A larger OAS implies a greater return for greater risks.

Prepayment Risk
The risk associated with the early unscheduled return of principal ... 
Static Spread
The constant yield spread which when added to the point on the ... 
Intermarket Sector Spread
The difference in yields between two fixedincome securities ... 
FixedIncome Security
An investment that provides a return in the form of fixed periodic ... 
Interest Rate Risk
The risk that an investment's value will change due to a change ... 
Active Bond
A bond or other fixedincome security that is frequently traded ...

Term
What's the OptionAdjusted Spread?
The optionadjusted spread, or OAS, measures a fixedincome security rateâ€™s spread and the riskfree rate of return thatâ€™s adjusted to account for an embedded option. 
Investing
RiskFree Rate of Return
The riskfree rate of return is the theoretical rate of return of an investment with zero risk. The riskfree rate represents the interest an investor would expect from an absolutely riskfree ... 
Bonds & Fixed Income
How Safe Are U.S. Bonds?
U.S. Treasury securities are often described as riskfree investments, but that is just not true. 
Options & Futures
How Risk Free Is The RiskFree Rate Of Return?
This rate is rarely questioned  unless the economy falls into disarray. 
Term
Understanding Yield Spread
Yield spread is the difference in yields between debt instruments. 
Investing
What are FixedIncome Securities?
For a fixedincome security, the periodic return on the investment is the same throughout the life of the security. Principal is returned at the time of maturity. The payment can be in the form ... 
Bonds & Fixed Income
Advanced Bond Concepts
Learn the complex concepts and calculations for trading bonds including bond pricing, yield, term structure of interest rates and duration. 
Bonds & Fixed Income
How Bond Market Pricing Works
Yield is the commonest measure used to determine a bondâ€™s expected return. Yieldtomaturity and spot rates are the two primary yield measures. 
Bonds & Fixed Income
Advanced Bond Concepts: Introduction
In their simplest form, bonds are pretty straightforward. After all, just about anyone can comprehend the borrowing and lending of money. However, like many securities, trading and analyzing ... 
Investing Basics
How to Calculate Risk Premium
Think of a risk premium as a form of hazard pay for risky investments.

What is Zspread and option adjusted credit spread?
Read about the uses of and connection between the zerovolatility spread (Zspread) and the optionadjusted credit spread ... Read Answer >> 
What is the difference between an optionadjusted spread and a Zspread in reference ...
Learn about the difference between the Zspread and optionadjusted spread valuations of future cash flows for bonds, and ... Read Answer >> 
What are the most popular and useful measures of credit spread?
Learn about the different types of credit spread measures that measure risk, including the zerovolatility spread and the ... Read Answer >> 
How is bond yield affected by monetary policy?
Learn about how bond yields are affected by monetary policy. Monetary policy determines the riskfree rate of return, which ... Read Answer >> 
What is the correlation between equity risk premium and risk?
Learn about the relationship between the riskfree rate of return and the equity risk premium, and understand how the riskfree ... Read Answer >> 
What are the biggest risks of fixedincome investing?
Learn about the three biggest risks of bonds and other fixedincome investments. Find out more about related issues and learn ... Read Answer >>