hard · Debt Capital Markets
For a callable bond, how does the Option-Adjusted Spread (OAS) typically relate to the Z-spread, and what does the difference represent?
- OAS is lower than the Z-spread; the difference is the cost of the embedded call option to the issuer.
- OAS is higher than the Z-spread; the difference is the premium the investor pays for the call.
- OAS is lower than the Z-spread only if the bond is trading at a significant discount.
- OAS and Z-spread are identical for all bonds except those in default.
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