hard · FRM Part 1
In the context of mortgage-backed securities (MBS), if interest rates fall, the 'Option-Adjusted Spread' (OAS) will behave differently than the 'Z-spread' because:
- OAS is only applicable to Agency MBS without credit risk.
- The OAS increases as prepayments increase.
- The OAS excludes the cost of the borrower's prepayment option.
- The Z-spread is always lower than the OAS.
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