Question: 16. Suppose that a callable bond is valued using as the benchmark interest rates the on-the-run yield curve of the issuer and that the yield

16. Suppose that a callable bond is valued using as the benchmark interest rates the on-the-run yield curve of the issuer and that the yield for the 10-year issue is 6%. Suppose further that the option-adjusted spread computed for a 10-year callable bond of this issuer is 20 basis points. Is it proper to interpret the OAS as meaning that the 10-year callable bond is offering a spread of 20 basis point over the 6% yield on the 10-year on-the run-issue?

If not, what is the proper interpretation of the 20 basis point OAS?

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