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 ... 
Embedded Option
A provision in a security that is an inseparable part of the ... 
RiskFree Rate Of Return
The theoretical rate of return of an investment with zero risk. ... 
RiskFree Return
The theoretical rate of return attributed to an investment with ... 
RiskFree Asset
An asset which has a certain future return. Treasuries (especially ... 
Static Spread
The constant yield spread which when added to the point on the ...

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. 
Professionals
Differentiating Between Spreads
CFA Level 1  Differentiating Between Spreads. Learn the differences between the zspread and an optionadjusted spread. Shows how both spreads relate to the cost of an option. 
Bonds & Fixed Income
How Bond Market Pricing Works
Learn the basic rules that govern how bond prices are determined. 
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
Guide To Embedded Options In Bonds
Investors should be aware of embedded options that may be available in certain securities as these options may affect the value of the security. 
Professionals
Options and their Benefits
CFA Level 1  Options and their Benefits. Learn how some options can benefit the holder of a bond, while others benefit the issuer. Relates the degree of liquidity to yield spreads. 
Investing
Understanding Market Risk Premium
Market risk premium is equal to the expected return on an investment minus the riskfree rate. The riskfree rate is the minimum rate investors could expect to receive on an investment if it ... 
Options & Futures
How Risk Free Is The RiskFree Rate Of Return?
This rate is rarely questioned  unless the economy falls into disarray. 
Professionals
Types of Yield Measures
CFA Level 1  Types of Yield Measures. Learn the different methods of calculating yield spreads and the formulas behind them. Discusses the benefits of using relative yield spreads. 
Term
Understanding Yield Spread
Yield spread is the difference in yields between debt instruments.

What is Zspread and option adjusted credit spread?
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What are the most popular and useful measures of credit spread?
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How is the riskfree rate of interest used to calculate other types of interest rates ...
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How is it possible for a rate to be entirely riskfree?
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How is bond yield affected by monetary policy?
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