Two portfolio managers are discussing the meaning of option-adjusted spread. Comment on each manager's interpretation of OAS.

 

Manager 1: "The OAS is a measure of the value of the option embedded in the bond. That is, it is the compensation for accepting option risk."

Manager 2: "The OAS is a measure of the spread relative to the Treasury on-the-run yield curve and reflects compensation for credit risk and liquidity risk."

2.Explain how an increase in expected interest rate volatility can decrease the value of a callable bond?

3.What market condition will the holder of call option or put option exercise their right?

Answer rating: 100% (QA)

Manager 1s interpretation of the optionadjusted spread OAS is accurate The OAS represents the additional spread or yield compensation investors receiv... View the full answer