OAS (Option-Adjusted Spread)
Corporate Credit Analysis glossary · Corporate Credit Analysis
Definition
A bond's spread after adjusting for embedded options such as calls or puts. For callable bonds, OAS is less than Z-spread because the option premium has been stripped out.
OAS (Option-Adjusted Spread) in plain English
Some bonds come with a built-in escape hatch — for example a "callable" bond lets the company pay it off early, which is great for the company but annoying for you as the investor. OAS (Option-Adjusted Spread) is the bond's extra yield over a safe benchmark AFTER mathematically stripping out the value of that escape hatch, so you're comparing the bond's true reward for taking credit risk on an apples-to-apples basis. Because that early-payoff option is worth something to the issuer, OAS ends up smaller than the raw "Z-spread" — it's like quoting a car's price after subtracting the value of the free extras, so you can compare it honestly to a car with none.
Also called: Option-Adjusted Spread
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