Option-adjusted spread (OAS)
Principles of Finance glossary · Time Value of Money
Definition
The constant spread over the risk-free curve that reconciles model price with market price for a bond with embedded options, stripped of option value.
Option-adjusted spread (OAS) in plain English
Some bonds come with a built-in escape hatch — for example, the company can pay you back early ("call" the bond) if that becomes convenient for them, which is bad for you. That optional feature makes the bond's price hard to compare fairly to a plain bond. The option-adjusted spread is the extra yield (over safe government rates) a bond pays you AFTER a model mathematically removes the value of that escape-hatch option — so you're left with the bond's true reward for its credit risk. Think of it like comparing two used cars' prices only after subtracting the value of one car's fancy sunroof, so you're judging the cars themselves, not the extras.
Also called: OAS
Learn these first
Practice Option-adjusted spread (OAS)
If the Z-spread is 180 bps, what is the 'option cost' and what does it represent?
Related Principles of Finance terms
Principles of Finance practice questions · Principles of Finance flashcards · Principles of Finance study guide